AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1997
REGISTRATION NO. 333-15995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-0493875
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
9950 MAYLAND DRIVE
RICHMOND, VIRGINIA 23233
(804) 527-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
RICHARD L. SHARP, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
CIRCUIT CITY STORES, INC.
9950 MAYLAND DRIVE
RICHMOND, VIRGINIA 23233
(804) 527-4000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
ROBERT L. BURRUS, JR., ESQ. RAYMOND W. WAGNER, ESQ.
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P. SIMPSON THACHER & BARTLETT
ONE JAMES CENTER 425 LEXINGTON AVENUE
RICHMOND, VIRGINIA 23219 NEW YORK, NEW YORK 10017
(804) 775-1000 (212) 455-2000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
<S> <C>
Circuit City Stores, Inc. --
CarMax Group Common Stock, par value $.50 per share....................... $433,780,000 $131,449(1)
Rights to Purchase Preferred Stock,
Series F, par value $20.00 per share(2)................................... N/A N/A
Circuit City Stores, Inc. --
Circuit City Group Common Stock, par value $.50 per share(3)(4)........... N/A N/A
Rights to Purchase Preferred Stock,
Series E, par value $20.00 per share(5)................................... N/A N/A
</TABLE>
(1) Fee was calculated pursuant to Rule 457(o) and $111,732 has been previously
paid.
(2) Prior to the occurrence of certain events, the Rights will not be evidenced
or traded separately from the CarMax Group Common Stock. Value, if any, of
the Rights is reflected in the market price of the CarMax Group Common
Stock. Accordingly, no separate fee is paid.
(3) Registered solely because the shares of CarMax Group Common Stock registered
under this Registration Statement may be converted, at the option of the
Registrant, into shares of Circuit City Group Common Stock in accordance
with the terms of the CarMax Group Common Stock.
(4) No additional consideration would be paid by the holders of CarMax Group
Common Stock upon a conversion of the CarMax Group Common Stock into Circuit
City Group Common Stock. Accordingly, no separate fee is paid.
(5) Prior to the occurrence of certain events, the Rights will not be evidenced
or traded separately from the Circuit City Group Common Stock. Value, if
any, of the Rights is reflected in the market price of the Circuit City
Group Common Stock. Accordingly, no separate fee is paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus, one to be used
in connection with the offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with the offering outside the
United States and Canada (the "International Prospectus"). The two prospectuses
are identical except for the front cover page. The form of U.S. Prospectus
included herein is followed by the front cover page to be used in the
International Prospectus. The alternate page for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus."
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 3, 1997
18,860,000 SHARES
CIRCUIT CITY STORES, INC. -- CARMAX GROUP
COMMON STOCK
OF
CIRCUIT CITY STORES, INC.
------------------------
OF THE 18,860,000 SHARES OF CARMAX STOCK BEING OFFERED, 15,088,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 3,772,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." THE NET PROCEEDS FROM THE OFFERING WILL BE ALLOCATED TO
THE CARMAX GROUP. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE CARMAX STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $18 AND $20. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE CARMAX STOCK IS COMMON STOCK OF THE COMPANY THAT IS INTENDED TO REFLECT
SEPARATELY THE PERFORMANCE OF THE USED- AND NEW-CAR RETAIL BUSINESS
CONSTITUTING THE CARMAX GROUP OF THE COMPANY. A SECOND SERIES OF COMMON STOCK
OF THE COMPANY, THE CIRCUIT CITY STOCK, IS INTENDED TO REFLECT SEPARATELY
THE PERFORMANCE OF THE CONSUMER ELECTRONICS AND APPLIANCE RETAIL BUSINESS
CONSTITUTING THE COMPANY'S CIRCUIT CITY GROUP, INCLUDING THE CIRCUIT CITY
GROUP'S INTEREST IN THE CARMAX GROUP. HOLDERS OF CARMAX STOCK AND
CIRCUIT CITY STOCK ARE ALL HOLDERS OF COMMON STOCK OF THE COMPANY AND
CONTINUE TO BE SUBJECT TO ALL OF THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE COMPANY AND ALL OF ITS BUSINESSES, ASSETS AND
LIABILITIES. THE CIRCUIT CITY STOCK IS NOT BEING OFFERED FOR SALE BY
THIS PROSPECTUS.
DIVIDENDS ON THE CARMAX STOCK WILL BE PAID AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY OUT OF THE LESSER OF (I) THE ASSETS OF THE COMPANY
LEGALLY AVAILABLE FOR THE PAYMENT OF DIVIDENDS AND (II) THE CARMAX GROUP
AVAILABLE DIVIDEND AMOUNT. THE COMPANY CURRENTLY DOES NOT INTEND TO PAY
DIVIDENDS ON THE CARMAX STOCK. THE VOTING POWER OF ONE SHARE OF CARMAX
STOCK RELATIVE TO ONE SHARE OF CIRCUIT CITY STOCK WILL FLUCTUATE BASED
UPON THE TIME-WEIGHTED RELATIVE MARKET VALUES THEREOF.
SUBJECT TO CERTAIN CONDITIONS, THE CARMAX STOCK MAY BE REDEEMED, AT THE
COMPANY'S OPTION, FOR SHARES OF ONE OR MORE WHOLLY-OWNED SUBSIDIARIES OF THE
COMPANY TO WHICH THE ASSETS AND LIABILITIES OF THE CARMAX GROUP HAVE BEEN
TRANSFERRED. IN THE EVENT OF A DISPOSITION BY THE COMPANY OF ALL OR
SUBSTANTIALLY ALL OF THE PROPERTIES AND ASSETS OF THE CARMAX GROUP, THE COMPANY
WILL, SUBJECT TO CERTAIN CONDITIONS AND LIMITATIONS, BE REQUIRED TO (I) PAY A
DIVIDEND ON OR REDEEM SHARES OF CARMAX STOCK IN AN AMOUNT EQUAL TO THE PRODUCT
OF THE OUTSTANDING CARMAX FRACTION, MULTIPLIED BY THE NET PROCEEDS OF SUCH
DISPOSITION OR (II) CONVERT EACH OUTSTANDING SHARE OF CARMAX STOCK INTO A NUMBER
OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 110% OF THE RATIO OF THE AVERAGE MARKET
VALUE OF ONE SHARE OF CARMAX STOCK TO THE AVERAGE MARKET VALUE OF ONE SHARE OF
CIRCUIT CITY STOCK. THE COMPANY MAY, AT ANY TIME, CONVERT EACH SHARE OF CARMAX
STOCK INTO A NUMBER OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 115% OF THE RATIO
OF THE TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CARMAX STOCK TO THE
TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CIRCUIT CITY STOCK. IN THE
EVENT OF THE LIQUIDATION OF THE COMPANY, THE RIGHTS OF THE HOLDERS OF THE CARMAX
STOCK AND THE CIRCUIT CITY STOCK WILL BE FIXED ON A PER SHARE BASIS IN
PROPORTION TO THEIR RESPECTIVE LIQUIDATION UNITS, WITH EACH SHARE OF CARMAX
STOCK HAVING .5 OF A LIQUIDATION UNIT, AND EACH SHARE OF CIRCUIT CITY STOCK
HAVING ONE LIQUIDATION UNIT.
THE FEATURES OF THE CARMAX STOCK AND THE CIRCUIT CITY STOCK ARE MORE FULLY
DISCUSSED UNDER "SUMMARY -- THE CARMAX STOCK" AND "DESCRIPTION OF CAPITAL STOCK"
IN THIS PROSPECTUS. ------------------------
THE CARMAX STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "KMX",
SUBJECT TO OFFICAL NOTICE OF ISSUANCE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------ ------------------ --------------
PER SHARE.................................. $ $ $
TOTAL(3)................................... $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$1,101,450. SEE "UNDERWRITERS."
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF TO PURCHASE UP TO AN AGGREGATE OF
2,829,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE
TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES OF CARMAX STOCK ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND
IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT FEBRUARY , 1997
AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
GOLDMAN, SACHS & CO.
WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF THE CARMAX STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT
A PUBLIC OFFERING OF THE SHARES OF THE CARMAX STOCK OR POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT
PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE
POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE SHARES OF CARMAX STOCK AND THE DISTRIBUTION OF THIS
PROSPECTUS.
All references to "dollars" or "$" are to U.S. dollars.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................................ 3
SUMMARY................................................................................................................ 4
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.............................................................. 14
RISK FACTORS........................................................................................................... 14
USE OF PROCEEDS........................................................................................................ 24
DIVIDEND POLICY........................................................................................................ 24
CAPITALIZATION......................................................................................................... 25
DILUTION............................................................................................................... 26
BUSINESS OF THE CARMAX GROUP........................................................................................... 27
MANAGEMENT OF THE CARMAX GROUP......................................................................................... 41
CARMAX GROUP SELECTED HISTORICAL FINANCIAL DATA........................................................................ 42
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION..................... 43
CERTAIN MANAGEMENT AND ALLOCATION POLICIES............................................................................. 47
COMPANY SELECTED HISTORICAL FINANCIAL DATA............................................................................. 49
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.......................... 50
DESCRIPTION OF CAPITAL STOCK........................................................................................... 58
CERTAIN UNITED STATES TAX CONSEQUENCES................................................................................. 78
UNDERWRITERS........................................................................................................... 80
LEGAL MATTERS.......................................................................................................... 82
EXPERTS................................................................................................................ 82
AVAILABLE INFORMATION.................................................................................................. 83
GLOSSARY OF DEFINED TERMS.............................................................................................. 84
ILLUSTRATIONS OF CERTAIN TERMS......................................................................................... I-1
CARMAX GROUP FINANCIAL STATEMENTS...................................................................................... F-1
COMPANY FINANCIAL STATEMENTS........................................................................................... F-21
</TABLE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CARMAX STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by the Company are hereby incorporated by reference into this
Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 1996;
(b) all other reports filed with the Commission pursuant to Section 13(a)
or 15(d) since February 29, 1996, including the Quarterly Reports on
Form 10-Q for the fiscal quarters ended May 31, 1996, August 31, 1996
and November 30, 1996 and the Company's Current Reports on Form 8-K
filed with the Commission on March 8, 1996 and November 1, 1996;
(c) the Company's Proxy Statement filed with the Commission on December 24,
1996, but only as to Annexes V, VI and VII;
(d) the description of the Company's Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on January
2, 1997, as amended on Form 8-A/A filed with the Commission on January
31, 1997 (File No. 1-5767); and
(e) the description of the Rights to Purchase Preferred Stock, Series E and
the Rights to Purchase Preferred Stock, Series F contained in the
Registration Statement on Form 8-A filed with the Commission on January
2, 1997, as amended on Form 8-A/A filed with the Commission on January
31, 1997 (File No. 1-5767).
All documents filed by the Company, pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering of the CarMax Stock shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents. Any statement contained herein or in a document all or any
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such earlier statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to any person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the foregoing documents
incorporated herein by reference (other than certain exhibits to such
documents). Requests for such copies should be directed to Corporate Secretary,
Circuit City Stores, Inc., 9950 Mayland Drive, Richmond, Virginia 23233
(telephone number (804) 527-4022).
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS. AS USED
HEREIN, (I) THE "COMPANY" AND "CIRCUIT CITY" MEAN CIRCUIT CITY STORES, INC. AND
ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES,
(II)"CARMAX" MEANS THE CARMAX GROUP, (III)"CARMAX STOCK" MEANS THE CIRCUIT CITY
STORES, INC. -- CARMAX GROUP COMMON STOCK, PAR VALUE $.50 PER SHARE, AND
(IV)"CIRCUIT CITY STOCK" MEANS THE CIRCUIT CITY STORES, INC. -- CIRCUIT CITY
GROUP COMMON STOCK, PAR VALUE $.50 PER SHARE. UNLESS INDICATED OTHERWISE, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) AN INITIAL PUBLIC OFFERING
PRICE OF $19 PER SHARE (THE MIDPOINT OF THE RANGE SET FORTH ON THE COVER OF THIS
PROSPECTUS); (II) THAT THE U.S. UNDERWRITERS DO NOT EXERCISE THEIR
OVER-ALLOTMENT OPTION; (III) THE EFFECTIVENESS OF THE ACTIONS TAKEN AT THE
MEETING OF THE COMPANY'S SHAREHOLDERS HELD ON JANUARY 24, 1997 (THE "MEETING")
TO APPROVE (A) THE CARMAX STOCK PROPOSAL, (B) AN AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF THE COMPANY'S COMMON STOCK AUTHORIZED FOR ISSUANCE FROM 250,000,000 TO
350,000,000 AND (C) THE AMENDMENTS TO THE COMPANY'S 1994 STOCK INCENTIVE PLAN
(THE "STOCK INCENTIVE PLAN") TO RESERVE 5,700,000 SHARES OF CARMAX STOCK FOR
ISSUANCE UNDER THE STOCK INCENTIVE PLAN AND TO PERMIT THE CONVERSION OF
PREVIOUSLY OUTSTANDING OPTIONS TO ACQUIRE SHARES OF ONE OF THE COMPANY'S
SUBSIDIARIES (WHICH OUTSTANDING OPTIONS ARE HELD BY EMPLOYEES OF THE CARMAX
GROUP) INTO OPTIONS GRANTED UNDER THE STOCK INCENTIVE PLAN TO ACQUIRE SHARES OF
CARMAX STOCK (THE "CARMAX STOCK OPTIONS"); AND (IV) ALL SUCH PREVIOUSLY
OUTSTANDING OPTIONS HAVE BEEN SO CONVERTED INTO THE CARMAX STOCK OPTIONS. THE
FISCAL YEAR OF THE COMPANY ENDS ON THE LAST DAY OF FEBRUARY. UNLESS OTHERWISE
DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE
MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF DEFINED
TERMS."
CARMAX GROUP
OVERVIEW
CarMax is a leading retailer of used cars and light trucks in the United
States with six stores located in the Southeast and one vehicle reconditioning
center in Orlando, Florida. CarMax purchases, reconditions and sells used
vehicles at each of its stores and sells new vehicles at one of its Atlanta,
Georgia locations under a franchise agreement with Chrysler Corporation
("Chrysler"). CarMax provides its customers with a full range of related
services, including the financing of vehicle purchases through its own financing
unit, First North American Credit Corporation ("FNAC"), and through third
parties, and the sale of service policies. Since opening the first store in
Richmond, Virginia in October 1993, CarMax's retail operations have grown
rapidly, with total revenues of $77 million during the first full fiscal year
and $375 million for the nine months ended November 30, 1996. CarMax has
launched an aggressive, six-year rollout plan under which it plans to open one
additional store in Tampa, Florida by the end of fiscal 1997, eight to 10 stores
in fiscal 1998 and 15 to 20 stores each year thereafter through fiscal 2002.
CarMax was established in 1993 by the Company, a leading U.S. consumer
electronics retailer, to revolutionize the highly fragmented used-vehicle retail
market which was estimated at $294 billion in 1995. CarMax was created as a
result of the Company's desire to sustain the Company's growth beyond the end of
the decade. CarMax was the first used-vehicle retailer to offer a large
selection of quality used vehicles at low, fixed prices using a
customer-friendly sales process in an attractive, modern sales facility. CarMax
has designed a strategy to better serve this market by addressing the major
sources of dissatisfaction with traditional used-car retailing and to maximize
operating efficiencies with sophisticated systems and standardized operating
procedures and store formats. The Circuit City Group's focus on customer
satisfaction and operating efficiency has enabled it to become one of the
largest and most profitable consumer electronics companies in the United States,
with an ongoing and highly successful nationwide rollout of over 400 stores and
a 10-year compound annual growth rate in sales and earnings of 26 percent and 27
percent, respectively, for the period ended February 29, 1996. During the past
three years CarMax has leveraged, and continues to leverage, Circuit City's
operational expertise, innovative systems and resources to refine the
used-vehicle retailing concept, to develop store prototypes and proprietary
systems and to implement effective financial and operational controls that now
enable CarMax to embark on an aggressive, nationwide rollout. In addition,
CarMax currently intends to add new-car franchises to some of its existing and
new locations as it grows and to expand its retail repair service operations
commencing in fiscal 1998.
Automotive retailing, with more than $596 billion in 1995 sales, is the
largest consumer retail market in the United States, representing nearly 8
percent of the U.S. gross domestic product. Used-vehicle sales in 1995 were
estimated at $294 billion, with approximately $232 billion in sales by
franchised and independent dealers and the balance in privately negotiated
transactions. CarMax believes that conditions in the used-vehicle retail market,
coupled with its operating and growth strategies, provide CarMax with an
opportunity for substantial growth.
4
<PAGE>
OPERATING STRATEGIES
CarMax has pioneered and implemented operating strategies that enhance
customer satisfaction and loyalty and maximize operating efficiency. Since
opening its first store in Richmond, Virginia in October 1993, CarMax has
successfully implemented its operating model at five additional stores.
Excluding the Orlando, Florida store which opened November 6, 1996, each CarMax
store has been profitable during fiscal 1997 on a store-level basis, including
profits from vehicle financing but before the allocation of Group overhead
expenses.
LOW, FIXED "NO-HAGGLE" PRICES
CarMax has implemented an every-day low price strategy under which it sets
fixed, "no-haggle" prices on its used and new vehicles. Most prices are at or
below the best negotiated price in the market. Used vehicles at CarMax are
generally priced from $500 to $1,000 below National Automobile Dealers
Association ("NADA") average book value. Prices on all vehicles are clearly
displayed on each vehicle's price and information sticker and in CarMax
newspaper advertising.
BROAD SELECTION OF HIGH-QUALITY VEHICLES
Each CarMax store features a broad selection of quality used cars and light
trucks with a wide range of prices appealing to a wide range of potential
customers. CarMax stores vary in inventory size from 400 to 1,200 vehicles
depending on local market size and consumer demand. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs -- the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 70,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 70,000 miles, with most priced in a range from $4,500 to $10,500. To
ensure that CarMax quality standards are maintained, vehicles under both
programs undergo a comprehensive, certified quality inspection by CarMax service
technicians. CarMax backs its commitment to quality with a five-day or 250-mile,
money-back guarantee and a free, 30-day comprehensive warranty on each vehicle.
EFFICIENT, CUSTOMER-FRIENDLY SALES PROCESS
CarMax has developed a streamlined, innovative sales process that redefines
the way consumers buy vehicles. CarMax believes that the major causes of
consumer dissatisfaction with the traditional car-buying experience include: (i)
dealers' attempts to combine the vehicle purchase transaction with the trade-in
transaction and the sale of related products; (ii) the confrontational
negotiations between the customer and the dealer; (iii) the difficulty the
customer experiences in obtaining sufficient information to make informed
decisions; (iv) interaction with multiple personnel at different stages of the
buying process; and (v) the hidden costs and inflated prices embedded in the
sales process. By contrast, the CarMax process enables customers to separately
evaluate each step of the sales process described below and to make informed
decisions at each step based on complete information about their options and
associated prices. To increase efficiency, the customer is assisted throughout
the CarMax sales process by the same sales consultant and by AutoMation, the
customer-friendly, point-of-sale system that is proprietary to CarMax.
(Bullet) SELECTION AND PRICE. Customers can use AutoMation to
electronically search an entire store's inventory for vehicles that meet
their model and feature requirements and price range. AutoMation displays a
color picture of each vehicle and optionally generates a vehicle
information sheet with the vehicle price and selected features for the
customer's reference and a map directing the customer to the vehicle's
location on the lot. Prices are clearly displayed, along with selected
vehicle features, on each vehicle's price and information window sticker.
The CarMax low, "no-haggle" price policy assures all customers the same low
price and avoids confrontational price negotiations with customers.
(Bullet) TRADE-INS. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any
vehicle, usually in 30 minutes or less, and provide the vehicle's owner
with a written guaranteed cash offer that is good for seven days or 250
miles. The appraisal process is available to everyone, whether or not they
are purchasing a vehicle from CarMax. In contrast to the approach of
traditional dealers who seek to combine the vehicle purchase and trade-in
transactions, the CarMax sales process enables the customer to separately
evaluate and make an informed decision with respect to each transaction.
(Bullet) FINANCING. The sales consultant uses AutoMation to
electronically submit financing applications and receive responses from
multiple lenders, generally in less than eight minutes. Customers are then
able to review online with the sales consultant financing options and terms
from each prime financing source that CarMax uses, including the amount
5
<PAGE>
financed, interest rate, term and monthly payment. CarMax believes that, by
contrast, traditional dealers frequently offer inflated financing terms to
customers and do not clearly separate the components of the financing
transaction.
(Bullet) SERVICE POLICIES. CarMax offers primary and extended service
policies that have been custom-designed to its own specifications. CarMax
believes that superior coverage and low, fixed prices distinguish its
service policies from those of its competitors. Through AutoMation, the
customer can review online with the sales consultant all available service
policy options and costs and make an informed, unpressured decision. In
contrast, at many traditional dealerships customers may feel pressured into
buying service policies they do not want at inflated prices.
(Bullet) FEES AND OPTIONS. CarMax does not charge processing,
administration, application or other "hidden" fees (as much as $400 at many
traditional auto dealers) and does not attempt to sell other options at
inflated prices. CarMax charges only state-required fees that are clearly
displayed on the vehicles and in the AutoMation system.
SOPHISTICATED INVENTORY MANAGEMENT SYSTEMS AND CONTROLS
Through its inventory management systems and controls, CarMax minimizes
inventory carrying costs. AutoMation, the central feature of the CarMax
inventory management and control system, enables each vehicle to be tracked
throughout the sales process. Using the information provided by AutoMation, and
applying sophisticated statistical modeling techniques, CarMax is able to
optimize its inventory mix and display by store, anticipate future inventory
needs at each store, evaluate sales consultant performance and refine its
vehicle pricing strategy. CarMax maintains strict inventory aging policies under
which it disposes of any vehicle that has not been sold at retail within
specified periods. Less than one percent of CarMax's retail inventory is
ultimately sold at wholesale.
INCREASED EFFICIENCY THROUGH STANDARDIZATION AND IMPLEMENTATION OF "BEST
PRACTICES"
Since opening its first store in 1993, CarMax has acquired significant
knowledge and experience in operating used-vehicle stores and continually
refines its selling and operating procedures and store prototypes in order to
improve operating efficiency and customer service. As a result of this
experience, CarMax has adopted and implemented the "best practices" throughout
all of its stores by standardizing the most efficient and optimal processes.
CarMax believes that standardization of best practices will enable it to become
a low-cost operator within its industry.
ATTRACTIVE, EFFICIENT STORE PROTOTYPES
The CarMax store format provides an open and attractive physical
environment that CarMax believes enhances its customer-friendly and efficient
sales process and creates a unique shopping experience. The stores are currently
built in three different prototypes, with inventory capacity ranging from 400 to
1,200 cars, depending upon local market size and consumer demand. CarMax has
successfully implemented each of these prototypes.
GROWTH STRATEGIES
CarMax believes its operating strategies and the extensive experience of
its senior management team will enable it to capitalize on the significant
opportunities available in the large, highly-fragmented automotive retailing
industry. CarMax intends to aggressively grow its business through (i) a rapid
rollout of used-vehicle stores; (ii) the expansion of retail repair service
operations; and (iii) the addition of selected new-vehicle franchises.
RAPID ROLLOUT OF USED-VEHICLE STORES
CarMax has launched an aggressive, six-year rollout plan under which it
intends to reach a total store count of 80 to 90 locations by the end of fiscal
2002. CarMax already has under contract most of the sites that it plans to open
in fiscal 1998. Under the rollout plan, CarMax expects that it will experience a
substantial increase both in overall square footage and in display capacity,
with square footage increasing from 0.4 million square feet at the end of fiscal
1997 to between 4.6 and 5.9 million square feet at the end of fiscal 2002 and
display capacity increasing from 5,144 vehicles to between 51,000 and 66,000
vehicles over the same period. In addition to growth from the opening of new
stores, CarMax expects that it will realize significant sales growth from
comparable store sales increases as newly opened stores mature. CarMax believes,
based on its experience to date, that each store will reach its planned mature
sales and earnings potential by the end of its fourth year. However, given the
infrequent repeat purchase cycle on vehicles, sales and earnings may continue to
grow beyond this initial ramp-up period.
6
<PAGE>
EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. Retail repair service operations
have historically been a substantial source of dealer profitability,
representing approximately 43 percent of dealers' 1995 profits according to the
NADA. Currently, CarMax uses its service facilities to inspect and recondition
used vehicles acquired for resale and to provide existing customers with limited
maintenance and light repair services. As part of the rollout of used-vehicle
stores, CarMax plans to open additional reconditioning centers that will perform
an increasing share of the inspection and reconditioning functions, thereby
freeing up repair facilities at the stores. Under the rollout plan, CarMax
anticipates that its total in-store service bays will increase from 194 expected
at the end of fiscal 1997 to 2,580 expected at the end of fiscal 2002 (based on
an average of the annual range for facilities planned to be opened through
fiscal 2002). CarMax is currently operating prototypes for this expanded service
at its Atlanta, Georgia retail locations and is developing systems and
procedures that are designed to offer the retail-repair customer an efficient,
customer-friendly process consistent with the process that CarMax has developed
for its vehicle sales operations.
ADDITION OF NEW-VEHICLE FRANCHISES
CarMax believes that new-vehicle operations present opportunities for
incremental revenues and operational and financial synergies when combined with
used-vehicle operations. CarMax currently operates a Chrysler franchise at one
of its Atlanta, Georgia locations. In less than five months of operation, that
franchise surpassed the annual planning volume established by Chrysler. Based on
its experience to date with the Atlanta location, CarMax believes the addition
of a new-vehicle franchise to a used-vehicle store should provide incremental
revenues and contribute to the store's operating profits (including profits from
vehicle financing but before the allocation of group overhead expenses) during
the first full year of franchise operation. CarMax intends to aggressively
pursue new-car franchises for its new and existing stores both through
acquisition of franchises within the territory of its store operations and
through new grants. CarMax plans to add more than 25 new car franchises to its
used-car operations over the initial phase of its rollout through fiscal 2002.
However, given the relative unavailability of new franchises and the limited
availability of franchises within a suitable radius of its existing and proposed
stores, as well as the uncertain future willingness of manufacturers to approve
these transactions, CarMax cannot assure that it will be able to achieve this
portion of its growth plan. CarMax has received initial indications from several
foreign and domestic manufacturers of their willingness to approve CarMax as a
franchisee. CarMax is continuing to explore opportunities with these
manufacturers, as well as with existing franchised dealerships.
SYNERGIES WITH CIRCUIT CITY GROUP
As CarMax continues its rollout of used-vehicle stores, it will continue to
benefit from being a part of the Company by leveraging the Company's financial
strength, operational expertise, innovative systems and resources. These
benefits will include (i) a lower cost of capital due to the Company's
creditworthiness; (ii) significant cost savings on advertising through joint
purchasing of media with the Circuit City Group, one of the top purchasers of
newspaper advertising and spot television advertising in the United States;
(iii) the ability to leverage the Company's resources by executing
sale-leaseback and securitization financing transactions, (iv) access to the
Circuit City Group's real estate expertise, including site selection and
facilities construction; (v) the Company's extensive experience in extending
consumer credit; and (vi) management expertise from a team that contributed to
the rapid growth and success of the Circuit City Group.
THE COMPANY
The Company is comprised of the CarMax Group and the Circuit City Group.
The Circuit City Group is the nation's largest retailer of brand-name consumer
electronics and major appliances and a leading retailer of personal computers
and music software. It sells video equipment, including televisions, digital
satellite systems, video cassette recorders and camcorders; audio equipment,
including home stereo systems, compact disc players, tape recorders and tape
players; mobile electronics, including car stereo systems and security systems;
home office products, including personal computers, peripheral equipment and
facsimile machines; other consumer electronics products, including cellular
phones, telephones and portable audio and video products; entertainment
software; and major appliances, including washers, dryers, refrigerators,
microwave ovens and ranges.
The Company was incorporated in 1949 and is a Virginia corporation. The
principal executive office of the Company is located at 9950 Mayland Drive,
Richmond, Virginia 23233; its telephone number is (804) 527-4000.
7
<PAGE>
THE CARMAX STOCK PROPOSAL
On January 24, 1997, the shareholders of the Company approved a
comprehensive plan (the "CarMax Stock Proposal") that will result in a
restructuring of the Company's existing common stock into two new series of
common stock intended to reflect separately the performance of the Company's two
main businesses -- the CarMax Group, which is engaged in the used- and new-car
retail business and the Circuit City Group, which is engaged in the consumer
electronics and appliances retail business. The Circuit City Group includes the
interest of the Circuit City Group in the CarMax Group. The key elements of the
CarMax Stock Proposal are as follows:
(Bullet) The CarMax Stock is being created as a new series of common stock
to reflect the performance of the CarMax Group.
(Bullet) The CarMax Stock offered to the public will initially represent
20% of the equity value of the CarMax Group without giving effect
to the CarMax Stock Options (22.3% of such equity value if the
U.S. Underwriters' over-allotment option is exercised in full).
Upon completion of the Offering, the Circuit City Group will hold
the balance of such equity value of the CarMax Group not sold in
the Offering. The net proceeds of the Offering will be allocated
to the CarMax Group and used to finance part of the Company's
expansion plans for the CarMax Group and to repay the CarMax
Group's allocated portion of Company indebtedness that was
incurred to finance CarMax's growth to date.
(Bullet) Each of the currently outstanding shares of the Company's existing
common stock is being redesignated (the "Common Stock
Redesignation") as a share of the Circuit City Stock, which is
intended to reflect separately the performance of the Circuit City
Group, including its Inter-Group Interest in the CarMax Group. See
"Description of Capital Stock -- Inter-Group Interest."
THE OFFERING
<TABLE>
<S> <C>
Shares of CarMax Stock offered by the Company:
U.S. Offering....................................... 15,088,000 shares
International Offering.............................. 3,772,000 shares
Total Offered and Outstanding (1).............. 18,860,000 shares
Use of Proceeds....................................... The net proceeds will be used to finance part of the Company's
expansion plans for the CarMax Group and to repay the CarMax Group's
allocated portion of Company indebtedness that was incurred to
finance CarMax's growth to date.
New York Stock Exchange Symbol........................ "KMX."
</TABLE>
- ---------------
(1) Does not include (i) 75,440,000 shares which is the Number of Shares
Issuable with Respect to the Inter-Group Interest, (ii) 5,700,000 shares
reserved for issuance under the Stock Incentive Plan, of which approximately
4,781,808 are subject to the CarMax Stock Options with an average weighted
exercise price of $.51 per share, and (iii) 2,829,000 shares issuable upon
exercise of the U.S. Underwriters' over-allotment option.
8
<PAGE>
THE CARMAX STOCK
<TABLE>
<S> <C>
DIVIDENDS............................................. The Company currently does not intend to pay dividends on the CarMax
Stock.
Dividends on the CarMax Stock will be paid at the discretion of the
Board of Directors based primarily upon the financial condition,
results of operations and business requirements of the CarMax Group
and the Company as a whole. Dividends will be payable out of the
lesser of (i) the assets of the Company legally available for the
payment of dividends and (ii) the CarMax Group Available Dividend
Amount.
VOTING RIGHTS......................................... Except as otherwise described herein, the holders of CarMax Stock and
Circuit City Stock will vote together as a single voting group. Each
share of Circuit City Stock will have one vote per share. Each share
of CarMax Stock will have a variable vote equal to the ratio of the
time-weighted average Market Value of one share of CarMax Stock to
the time-weighted average Market Value of one share of Circuit City
Stock, calculated over the 20-Trading Day period ending 10 Trading
Days prior to the applicable record date, and may have more than,
less than or exactly one vote per share.
RIGHTS ON DISPOSITION................................. If the Company disposes of all or substantially all of the properties
and assets attributed to the CarMax Group (I.E., 80% or more on a
current market value basis), other than in a transaction in which the
Company receives primarily equity securities of an entity engaged or
proposing to engage primarily in a business similar or complementary
to the business of the CarMax Group, the Company must either (i)
distribute to holders of CarMax Stock an amount in cash and/or
securities or other property equal to the product of the Outstanding
CarMax Fraction and the Fair Value of the Net Proceeds of such
disposition, either by special dividend or by redemption of all or
part of the outstanding shares of CarMax Stock, or (ii) convert each
share of CarMax Stock into a number of shares of Circuit City Stock
equal to 110% of the ratio of the average Market Value of one share
of CarMax Stock to the average Market Value of one share of Circuit
City Stock, calculated over the 10-Trading Day period beginning on
the 16th Trading Day after consummation of the disposition
transaction.
The Company may, at any time prior to the first anniversary of a
dividend on, or partial redemption of, shares of CarMax Stock
following a disposition of all or substantially all of the properties
and assets attributed to the CarMax Group, convert each remaining
outstanding share of CarMax Stock into a number of shares of Circuit
City Stock equal to 110% of the ratio of the time-weighted average
Market Value of one share of CarMax Stock to the time-weighted
average Market Value of one share of Circuit City Stock, calculated
over the 20-Trading Day period ending five Trading Days prior to the
date of notice to holders of such conversion.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
CONVERSION AT OPTION OF COMPANY....................... The Company may, at any time, convert each share of CarMax Stock into
a number of shares of Circuit City Stock equal to 115% of the ratio
of the time-weighted average Market Value of one share of CarMax
Stock to the time-weighted average Market Value of one share of
Circuit City Stock, calculated over the 20-Trading Day period ending
five Trading Days prior to the date of notice to holders of such
conversion.
REDEMPTION IN EXCHANGE FOR
STOCK OF SUBSIDIARY................................. The Company may redeem the CarMax Stock for a number of shares of one
or more wholly owned subsidiaries of the Company that hold all of the
assets and liabilities attributed to the CarMax Group equal to the
proportionate interest in the CarMax Group represented by the
outstanding CarMax Stock.
LIQUIDATION........................................... Holders of CarMax Stock and Circuit City Stock will be entitled to a
portion of the assets remaining for distribution to holders of Common
Stock on a per share basis in proportion to the respective per share
liquidation units of such series (each, a "Liquidation Unit"). Each
share of CarMax Stock will have .5 of a Liquidation Unit and each
share of Circuit City Stock will have one Liquidation Unit, subject
to adjustment if shares of either series are subdivided, combined or
distributed as a dividend.
CERTAIN PROVISIONS OF THE CIRCUIT CITY STOCK.......... If the Company disposes of all or substantially all of the properties
and assets attributed to the Circuit City Group, the Company must
either distribute the Fair Value of the Net Proceeds thereof to
holders of Circuit City Stock by special dividend or redemption or
convert the Circuit City Stock into CarMax Stock, upon terms and
conditions comparable to those described under " -- The CarMax
Stock-Rights on Disposition." The Company may, at any time, convert
the Circuit City Stock into CarMax Stock upon terms and conditions
comparable to those described under " -- The CarMax Stock-Conversion
at Option of Company." The Company may redeem the Circuit City Stock
for all of the shares of one or more wholly owned subsidiaries of the
Company that hold all of the assets and liabilities attributed to the
Circuit City Group, and if at such time the Circuit City Group holds
an Inter-Group Interest, the Company also will issue shares of CarMax
Stock in respect of the Inter-Group Interest either to the holders of
Circuit City Stock or to one or more of such subsidiaries.
</TABLE>
INTER-GROUP INTEREST
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would represent 100% of the equity value
of the CarMax Group prior to the Offering. The 18,860,000 shares of CarMax Stock
to be issued in the Offering will be issued for the account of the CarMax Group.
As a result, immediately after the Offering, the Outstanding CarMax Fraction
will equal 20% and the Inter-Group Interest Fraction will equal 80%, without
giving effect to the CarMax Stock Options. If the U.S. Underwriters exercise
their over-allotment option, the number of shares subject to such option also
will be issued for the account of the CarMax Group. If the over-allotment option
is exercised in full, the Outstanding CarMax Fraction will equal 22.3% and the
Inter-Group Interest Fraction will equal 77.7%, without giving effect to the
CarMax Stock Options. At the time of any additional issuance of CarMax Stock,
the Company will identify the number of shares issued for the account of the
Circuit City Group, if any, through a reduction in the Number of Shares Issuable
with Respect to the Inter-Group Interest, the net proceeds of which will be
allocated to the Circuit City Group, and the number of shares issued for the
account of the CarMax Group, if any, the net proceeds of which will be allocated
to the CarMax Group.
10
<PAGE>
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group.
For further discussion of the Inter-Group Interest, see "Description of
Capital Stock -- Inter-Group Interest" and Annex I hereto.
RISK FACTORS
When evaluating the CarMax Stock, prospective investors should be aware of
certain risk factors relating to the business of the CarMax Group and to the
CarMax Stock. With respect to the business of the CarMax Group, such risk
factors include: (i) CarMax's limited operating history and history of losses;
(ii) the risks associated with expansion; (iii) the highly competitive nature of
the automotive retail industry; (iv) the need for substantial additional capital
to fund planned expansion; (v) the sufficiency of sources of used vehicles to
meet current needs and to support planned expansion; (vi) dependence on and
availability of key personnel; (vii) uncertainty regarding the expansion of
retail repair service operations; (viii) the limited availability of, and
manufacturer control over, existing and new franchises for the sale of new
vehicles; (ix) the cyclicality and seasonality of automobile sales; (x) the
effects of any decline in the quality of the CarMax Group's installment sales
contract portfolio; (xi) certain legal proceedings; and (xii) the effect of
environmental and other governmental regulations.
With respect to the CarMax Stock, such risk factors include: (i) the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities; (ii) limited separate shareholders' rights with respect to the
two series of Common Stock; (iii) the lack of legal precedent with respect to
the fiduciary duties of the board of directors of a company with two series of
common stock, the rights of which are defined by specified operations of the
company; (iv) the potential diverging interests of two series of common stock;
(v) the ability of the Board of Directors to change management and allocation
policies without shareholder approval; (vi) the ability to transfer funds
between the Groups; (vii) the effect of allocating financing costs between the
Groups; (viii) the potential effects of a possible disposition of assets
attributed to the CarMax Group; (ix) the Company's ability to issue authorized
but unissued shares of CarMax Stock without shareholder approval; (x)
limitations on potential unsolicited acquisitions of the CarMax Group; and (xi)
the absence of a prior market for the CarMax Stock and the possible volatility
of the price of the CarMax Stock following the Offering.
For additional information with respect to the foregoing considerations,
see "Risk Factors."
USE OF SERVICE MARKS
The mark "Circuit City" used herein is a federally registered service mark
of the Circuit City Group and the marks "CarMax," "MaxCare," "ValuMax" and
"AutoMation" used herein are federally registered service marks of the CarMax
Group.
11
<PAGE>
CARMAX GROUP
SUMMARY PRO FORMA AND HISTORICAL FINANCIAL DATA
The summary historical financial data presented below as of November 30,
1996, and for the nine months ended November 30, 1996 and 1995, were derived
from the CarMax Group's unaudited interim Financial Statements set forth herein,
which include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Interim operating results are not necessarily indicative of the results that may
be expected for a full year. The summary historical financial data presented
below as of February 29, 1996, and for each of the years in the three-year
period ended February 29, 1996, were derived from the CarMax Group's Financial
Statements set forth herein. The unaudited pro forma results of operations for
the nine months ended November 30, 1996, and the fiscal year ended February 29,
1996, give effect to the Offering at an assumed public offering price of $19 per
share (and assuming that the underwriters do not exercise any over-allotment
option) and the application of a portion of the net proceeds to repay the CarMax
Group's allocated portion of Company indebtedness as described under "Use of
Proceeds" as if they had occurred on March 1, 1995. The unaudited balance sheet,
as adjusted, as of November 30, 1996, gives effect to the pro forma transactions
and events described above, as if they had occurred on November 30, 1996. The
summary financial data should be read in conjunction with the CarMax Group's
Financial Statements, the CarMax Group's unaudited interim Financial Statements
and the information in "CarMax Management's Discussion and Analysis of Results
of Operations and Financial Condition" set forth herein, as well as the
Company's Consolidated Financial Statements, the Company's unaudited interim
Consolidated Financial Statements, and the information in "Company Management's
Discussion and Analysis of Results of Operations and Financial Condition" set
forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C>
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $375 $203 $276 $ 77 $ 16
Cost of sales......................................... 344 186 252 72 14
---- ---- ---- ---- ----
Gross profit....................................... 31 17 24 5 2
---- ---- ---- ---- ----
Selling, general and administrative expenses.......... 35 21 29 11 5
Interest expense...................................... 4 3 4 1 --
---- ---- ---- ---- ----
Total expenses........................................ 39 24 33 12 5
---- ---- ---- ---- ----
Loss before income tax benefit..................... 8 7 9 7 3
Income tax benefit.................................... 3 3 4 3 1
---- ---- ---- ---- ----
Net loss........................................... $ 5 $ 4 $ 5 $ 4 $ 2
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<TABLE>
<S> <C>
PRO FORMA RESULTS OF OPERATIONS (a)
Interest expense...................................... $ -- $ --
---- ----
Total expenses........................................ 35 29
---- ----
Loss before income tax benefit..................... 4 5
Income tax benefit.................................... 2 2
---- ----
Net loss........................................... $ 2 $ 3
---- ----
---- ----
Net loss attributable to CarMax Stock (b).......... $ .4 $ .6
---- ----
---- ----
Weighted average shares outstanding (c)............ 24 24
---- ----
---- ----
Net loss per share (b)............................. $.02 $.02
---- ----
---- ----
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 30, 1996 FEBRUARY 29, 1996
------------------------- -----------------
AS ADJUSTED (A) ACTUAL ACTUAL
--------------- ------ -----------------
<S> <C>
BALANCE SHEET DATA
Working capital.......................................... $ 249 $(18) $ 47
Total assets............................................. 351 184 103
Total debt............................................... -- 172 97
Accumulated group equity (deficit)....................... 323 (16) (11)
</TABLE>
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(a) Reflects the consummation of the Offering and the application of a portion
of the net proceeds to repay the CarMax Group's allocated portion of Company
indebtedness. Proceeds not used to repay such indebtedness may be invested
temporarily in an interest-bearing loan to the Circuit City Group. See "Use
of Proceeds" and "Capitalization."
(b) The net loss attributable to CarMax Stock is equal to the product of (i) the
net loss and (ii) the Outstanding CarMax Fraction. Net loss per share is
computed by dividing the net loss attributable to CarMax Stock by the
weighted average shares outstanding of CarMax Stock.
(c) The weighted average shares outstanding assumes that (i) 18,860,000 shares
of CarMax Stock have been outstanding for the period presented and (ii)
4,653,171 shares of CarMax Stock underlying the CarMax Stock Options are
outstanding utilizing the treasury stock method assuming that the initial
public offering price is $19 per share.
12
<PAGE>
THE COMPANY
SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary consolidated historical financial data presented below as of
November 30, 1996, and for the nine months ended November 30, 1996 and 1995 were
derived from the Company's unaudited interim Consolidated Financial Statements
set forth herein, which include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary to present fairly such data for
an interim period. Interim operating results are not necessarily indicative of
the results that may be expected for a full year. The summary consolidated
historical financial data presented below as of February 29, 1996, and for each
of the years in the five-year period ended February 29, 1996, were derived from
the Company's Consolidated Financial Statements set forth herein. The unaudited
pro forma balance sheet presented below as of November 30, 1996, gives effect to
the Offering at an assumed public offering price of $19 per share (and assuming
that the underwriters do not exercise any over-allotment option) and the
application of a portion of the net proceeds to repay the CarMax Group's
allocated portion of Company indebtedness, as if they had occurred on November
30, 1996. The summary consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements, the Company's unaudited
interim Consolidated Financial Statements, and the information in "Company
Management's Discussion and Analysis of Results of Operations and Financial
Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ----------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $5,246 $4,776 $7,029 $5,583 $4,131 $3,270 $2,790
Cost of sales, buying and warehousing................. 4,065 3,683 5,394 4,198 3,025 2,346 1,981
------ ------ ------ ------ ------ ------ ------
Gross profit....................................... 1,181 1,093 1,635 1,385 1,106 924 809
------ ------ ------ ------ ------ ------ ------
Selling, general and administrative expenses.......... 1,051 921 1,323 1,106 892 745 676
Interest expense...................................... 20 17 25 10 5 4 9
------ ------ ------ ------ ------ ------ ------
Total expenses........................................ 1,071 938 1,348 1,116 897 749 685
------ ------ ------ ------ ------ ------ ------
Earnings before income taxes....................... 110 155 287 269 209 175 124
Provision for income taxes............................ 42 58 108 101 77 65 46
------ ------ ------ ------ ------ ------ ------
Net earnings....................................... $ 68 $ 97 $ 179 $ 168 $ 132 $ 110 $ 78
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 30, 1996 FEBRUARY 29, 1996
------------------------- -----------------
AS ADJUSTED (A) ACTUAL ACTUAL
--------------- ------ -----------------
<S> <C>
BALANCE SHEET DATA
Working capital....................................... $ 1,103 $ 836 $ 905
Total assets.......................................... 3,501 3,334 2,526
Total debt............................................ 853 1,025 493
Total stockholders' equity............................ 1,471 1,132 1,064
</TABLE>
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(a) Reflects the consummation of the Offering and the application of a portion
of the net proceeds to repay the CarMax Group's allocated portion of Company
indebtedness.
13
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under the captions "Summary," "Business of the
CarMax Group," "CarMax Group Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Company Management's Discussion and
Analysis of Results of Operations and Financial Condition" or incorporated by
reference herein from Annexes V, VI and VII to the Company's Proxy Statement
filed with the Commission on December 24, 1996, including statements regarding
the CarMax Group's growth strategy and the implementation of its expansion plan,
CarMax's ability to fund such expansion plan, the projected growth and results
of operations of the CarMax Group's business and the factors contributing
thereto, the Circuit City Group's Superstore expansion plans, the Company's
growth projections and the Company's liquidity needs, and other statements
contained herein regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors" and in the Company's 1996 Annual Report on Form 10-K,
incorporated by reference herein.
RISK FACTORS
INVESTMENT IN THE CARMAX STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL CONSIDERATION TO THE FOLLOWING FACTORS
BEFORE PURCHASING SHARES OF THE CARMAX STOCK OFFERED HEREBY.
FACTORS RELATING TO THE CARMAX BUSINESS
LIMITED OPERATING HISTORY; HISTORY OF NET LOSSES; STORE MATURITY
CarMax opened its first store location in Richmond, Virginia in October
1993 and now operates six stores and one reconditioning center. Excluding its
Orlando, Florida store which opened November 6, 1996, each CarMax store has been
profitable during fiscal 1997 on a store-level basis including profits from
vehicle financing but before the allocation of Group overhead expenses. Net
losses for the CarMax Group were $1.8 million, $4.1 million and $5.2 million in
fiscal 1994, 1995 and 1996, respectively, and $3.9 million and $4.5 million for
the three and nine months ended November 30, 1996, respectively. CarMax expects
to produce a greater loss in fiscal 1997 compared to fiscal 1996 due to the
increased Group overhead and other infrastructure costs to support its
accelerated rollout plan and costs of enhancements to existing locations. The
loss for the fourth quarter of fiscal 1997 is expected to be similar to that of
the third quarter of fiscal 1997. CarMax believes, based on current trends, that
each store will reach its planned mature sales and earnings potential by the end
of its fourth year; however, because none of the CarMax stores has been open for
four years, there can be no assurance the period to store maturity will not be
longer or shorter than four years.
RISKS ASSOCIATED WITH EXPANSION
The CarMax growth strategy calls for aggressive expansion of its store
base. By the end of fiscal 2002, CarMax expects to be operating 80 to 90 stores
in 45 of the nation's top 50 markets. CarMax's ability to implement this growth
strategy, and to do so profitably, will depend on many factors, including those
discussed under " -- Highly Competitive Industry; New Entrants;" " -- Need for
Substantial Additional Capital;" " -- Sourcing of Used Cars;" " -- Dependence
Upon and Availability of Key Personnel;" " -- Uncertainty Regarding Expansion of
Retail Repair Service Operations;" " -- Manufacturer Control Over Existing and
New Franchises; Franchising Agreement with Chrysler;" and " -- Cyclicality of
Automobile Sales; Geographic Concentration." Additional factors include CarMax's
ability to (i) obtain suitable sites for new stores at a reasonable cost, (ii)
adapt and enhance its management systems and controls to support the expanded
operations and (iii) expand its operations, including used- and new-vehicle
sales, so as to generate additional revenues without proportionately increasing
Group overhead. In addition, unforeseen expenses and delays associated with a
rapid rollout of new stores and retail services may be encountered that could
have a material adverse effect on the business, results of operations and
financial condition of CarMax and its planned expansion.
HIGHLY COMPETITIVE INDUSTRY; NEW ENTRANTS
Automotive retailing in the United States is highly competitive with
approximately 23,000 franchised dealers and an even greater number of
independent used-vehicle dealers. In the used-vehicle market, CarMax competes
with existing franchised and independent dealers, rental companies and private
parties. The used-vehicle market has also attracted attention recently from a
number of companies, some with substantial resources, that have entered, or have
announced plans to enter,
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this market through a national or regional network of used-vehicle stores. Many
franchised new-car dealerships have also increased their focus on the
used-vehicle market. CarMax believes that these companies and dealerships are
attracted by the potential for generating high sales volume per location, the
relatively high gross margins that currently exist in this market and the
industry's fragmentation and potential for consolidation. Part of CarMax's
business strategy is to position itself as the low-price, low-cost operator in
the industry. However, increased competition in this industry, particularly from
new entrants adopting non-traditional selling methods similar to those used by
CarMax, could result in, among other things, increased wholesale costs for used
cars and lower retail sales prices and margins than expected, which could
adversely affect the business, results of operations and financial condition of
CarMax.
In the new-vehicle market, CarMax competes with other franchised dealers
offering vehicles produced by the same or other manufacturers, auto brokers and
leasing companies. As is typical of such arrangements, CarMax's existing
franchise agreement with Chrysler does not guarantee exclusivity within a
specified territory. CarMax could therefore face even greater competition at its
existing and any future new-vehicle franchise locations if the manufacturers
awarding such franchises award additional dealership franchises to others in the
same market areas.
Aggressive discounting by manufacturers of new cars, which typically occurs
in the fall during the close-out of prior year models, may result in lower
retail sales prices and margins for used vehicles during such discounting.
CarMax's inventory includes a significant percentage of late model vehicles
which would be particularly affected by such discounting. Therefore, aggressive
or prolonged discounting by manufacturers may have a material adverse effect on
CarMax's results of operations for the periods in which such discounting occur.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
CarMax will require substantial additional capital in order to fund its
planned rollout of stores. If adequate funds are not available, CarMax may be
required to significantly curtail its expansion plans. The Group has funded most
of its capital expenditures for the opening of new stores through Company debt
allocated to the CarMax Group and sale-leaseback transactions and sells most of
its installment loan receivables generated by FNAC through its auto loan
securitization program. CarMax's ability to fund the planned expansion of its
store base and installment loan portfolio is directly related to the continued
availability of these funding sources. CarMax is also working to obtain cost
effective securitization of automobile inventory; however, there can be no
assurance that it will be able to do so. CarMax's ability to continue to
undertake both sale-leaseback and securitization transactions, and to do so on
economically favorable terms, depends in large part on the existence of
available financing capacity of the Company. There can be no assurance that the
Company will continue to have capacity available or, if it does, that it would
be made available to the CarMax Group. Decisions relating to the allocation of
available financing capacity between the CarMax Group and the Circuit City Group
would be made by the Board of Directors in its good faith business judgment or
in accordance with procedures and policies adopted by the Board of Directors
from time to time. See " -- Factors Relating to the CarMax Stock -- Potential
Diverging Interests -- Operational and Financial Decisions" and " -- Allocation
of Financing Costs; Transfers of Funds Between Groups; Equity Contributions" and
" Certain Management and Allocation Policies."
The terms of sale-leaseback and securitization transactions are affected by
a number of other factors which are beyond the control of CarMax and the
Company, including, among others, conditions in the securities and finance
markets generally, prevailing interest rates, conditions in the markets for
securitized instruments and lease financings and approval by all parties to the
terms of the transaction. Profits from the extension of credit for vehicle
financing contribute significantly to the profitability of CarMax. Any increase
in the cost of sale-leaseback or securitization financings would increase the
effective rental cost of real estate or reduce the profitability of CarMax's
vehicle financing activities and, if significant, could have a material adverse
effect on the business, results of operations and financial condition of CarMax.
If for any reason the Company were unable to undertake securitization
transactions or otherwise sell its installment loan receivables, the net profit
from such receivables would be recognized over the life thereof rather than at
the time of the sale, which could have a material adverse effect on the results
of operations in a particular financial period.
Capital may also be raised by the Company through additional public or
private financings or borrowings; however, there can be no assurance that the
Company will be able to do so or that, if it does, the funds raised would be
made available to the CarMax Group. If additional funds are raised by issuing
equity securities allocated to the CarMax Group, dilution to the holders of
outstanding shares of CarMax Stock may result. See " -- Factors Relating to the
CarMax Stock -- Absence of Prior Market for CarMax Stock; Possible Volatility of
Stock Price."
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SOURCING OF USED CARS
CarMax acquires a significant proportion of its used-vehicle inventory
through its appraisal process in which CarMax appraises and makes an offer to
purchase any properly documented vehicle from the public. CarMax also acquires a
significant proportion of its used vehicles through auctions and, to a lesser
extent, directly from other sources, including wholesalers, franchised and
independent dealers and fleet owners, such as leasing companies and rental
companies. Some of the auctions for vehicles are closed except to the franchised
dealers of specific manufacturers. Based on consumer acceptance of the appraisal
process at existing CarMax stores and the experience and success of CarMax to
date in acquiring vehicles from auctions and other sources, management believes
that its sources of used vehicles will continue to be sufficient to meet current
needs and to support planned expansion. However, there can be no assurance that
sufficient inventory from such sources will continue to be available, or will be
available at comparable costs, particularly if changes occur in the type or
proportion of used vehicles that are sold in auctions closed to CarMax or if
competitive pressures increase as a result of new entrants to this market. See
" -- Highly Competitive Industry; New Entrants." Any reduction in inventory
availability, or increase in inventory wholesale costs that are not reflected in
retail market prices, for these or other reasons, could have a material adverse
effect on the business, results of operations and financial condition of CarMax
and its planned expansion.
DEPENDENCE UPON AND AVAILABILITY OF KEY PERSONNEL
CarMax's success will depend to a significant degree upon the continued
services of its senior management team as well as the Group's ability to attract
qualified personnel, including experienced location general managers, as the
business grows. In addition, the future performance of CarMax will depend upon
the Group's continued access to certain Circuit City Group personnel who are
experienced in rapid retail expansion, sale-leaseback and securitization
financing, consumer credit, site selection and facilities construction. The loss
of the services of key personnel, or the inability to attract and retain
additional personnel as needed, could have a material adverse effect upon CarMax
and its planned expansion.
UNCERTAINTY REGARDING EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. The Atlanta, Georgia stores are
currently serving as the prototypes for this expanded service function. Although
CarMax is developing new systems and procedures intended to result in efficient,
profitable retail repair service operations, there can be no assurance that
CarMax will be successful in doing so.
MANUFACTURER CONTROL OVER EXISTING AND NEW FRANCHISES; FRANCHISE AGREEMENT
WITH CHRYSLER
One component of the CarMax growth strategy is to acquire additional
new-vehicle franchises both through acquisition of franchises within the
territory of its existing and future used-vehicle stores and through new grants.
CarMax's goal is to add more than 25 new-car franchises to its used-car
operations over the initial phase of its rollout through 2002. Given the
relative unavailability of new franchises and the limited availability of
franchises within a suitable radius of its existing and proposed stores, there
is no assurance that CarMax will be able to achieve this portion of its growth
plan. In addition, manufacturers have historically exercised significant control
over their franchisees, restricting them to specified locations and retaining
approval rights over changes in management and ownership. The ability of CarMax
to acquire existing franchises, as well as new franchises, will therefore depend
on obtaining the approval of manufacturers, and there can be no assurance that
CarMax will be able to obtain the requisite approvals from manufacturers on
acceptable terms. Certain manufacturers may be reluctant to approve acquisitions
by CarMax of new or existing franchises because of, among other things, their
opposition to diffuse corporate ownership of their dealerships, the potential
adverse effects on their existing franchisees or concerns with a single company
owning a large number of dealerships.
CarMax operates its new car dealership in the Atlanta, Georgia market under
a Sales and Service Agreement (the "Franchise Agreement") between Chrysler and a
subsidiary of the Company. The Franchise Agreement imposes various requirements
on CarMax and compliance with these requirements is closely monitored by
Chrysler. The Franchise Agreement may be terminated by Chrysler on generally not
less than 60 days written notice for specified reasons, including a breach by
CarMax of any of its obligations thereunder, or if, without Chrysler's prior
approval, the Company ceases to control the subsidiary that entered into the
agreement. See "Business of the CarMax Group -- Franchise Agreement with
Chrysler."
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CYCLICALITY OF AUTOMOBILE SALES; GEOGRAPHIC CONCENTRATION
Unit sales of vehicles, particularly new vehicles, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns,
the automotive retailing industry tends to experience similar periods of decline
and recession as the general economy. Although there has been a general trend of
increasing sales of used vehicles since 1991, there can be no assurance that the
industry will not experience sustained periods of decline in vehicle sales in
the future. CarMax believes that the industry is also influenced by consumer
confidence, the level of personal discretionary spending, interest rates and
credit availability. Any future adverse changes in economic conditions could
have a material adverse effect on the business, results of operations and
financial condition of CarMax and its planned expansion.
In addition to being affected by general economic trends, the success of
CarMax depends, in part, on regional auto-buying trends, local and regional
economic factors and other regional competitive pressures. Currently, CarMax
sells its vehicles in Virginia, North Carolina, Florida and Georgia. Conditions
and competitive pressures affecting these markets, such as price-cutting by
dealers in these areas or in new markets CarMax enters, or a general economic
downturn in the region, could adversely affect CarMax, although the automotive
retail industry as a whole might not be affected.
SEASONALITY
The business of CarMax is seasonal, with a disproportionate amount of sales
currently occurring in the first half of the fiscal year. Seasonality causes
difficulties in planning for a variety of resources, including personnel and
inventory, and may also make it difficult to detect, and respond in a timely and
effective way to, downturns in retailing when they occur, thereby increasing
risks inherent in the business. CarMax anticipates that the seasonality of its
business may vary from region to region as the Group expands its operations
geographically.
CREDIT RISK
Payments by customers on a number of the installment sales contracts
originated by FNAC become delinquent from time to time and some contracts end up
in default. There can be no assurance that the current credit performance of
FNAC's customers will be maintained or that general economic conditions will not
worsen and lead to higher rates of delinquency and default. While CarMax retains
limited liability with respect to such delinquencies or defaults under its
current securitization program, a general decline in the quality of its contract
portfolio could lead CarMax to reduce the availability of credit through FNAC,
with a corresponding decrease in sales and profitability.
LEGAL PROCEEDINGS
CarMax is currently involved in litigation relating to its right to use the
mark CARMAX. See "Business of the CarMax Group -- Legal Proceedings and
Insurance." While the Company believes that there is no merit to the allegations
and claims made by the other party to this litigation, an adverse outcome could
have a material adverse effect on the results of operations of CarMax during the
period in which the litigation is decided.
CarMax may be exposed to potential liabilities for personal injury or
property damage claims relating to the use of vehicles and other products sold
by it. Although CarMax maintains third-party product liability insurance and
other types of insurance in amounts it considers adequate, and the manufacturers
are required to indemnify CarMax for most product liability claims, there can be
no assurance that CarMax will not experience material legal claims in excess of
its insurance coverage, or material claims (such as those relating to its use of
the mark CARMAX) that ultimately would not be covered by insurance or
indemnification from the manufacturers. Furthermore, if any significant claims
are made against CarMax, the business of CarMax may be adversely affected by
resulting negative publicity.
ENVIRONMENTAL MATTERS; GOVERNMENT REGULATION
The business of CarMax involves the use, handling and disposal of hazardous
or toxic substances as well as the past and current operation and/or removal of
aboveground and underground storage tanks containing such substances.
Accordingly, CarMax is subject to federal, state and local laws and regulations
governing air and water quality and the handling, storage and disposal of
hazardous or toxic substances. Although CarMax believes that it does not have
any material environmental liabilities, compliance with new or more stringent
laws or regulations, stricter interpretations of existing laws or regulations or
the future discovery of environmental conditions at current or future CarMax
locations could require additional expenditures by CarMax, some of which could
be material.
The CarMax operations are also subject to ongoing regulation, supervision
and licensing under various other federal, state and local statutes, ordinances
and regulations. Among other things, these laws require that CarMax obtain and
maintain
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certain licenses and regulate the manner in which CarMax conducts its business,
including its advertising and sales practices. In addition, the financing
activities of CarMax with its customers are subject to federal truth in lending,
consumer lending and equal credit opportunity regulations as well as state and
local motor vehicle finance laws, installment finance laws, usury laws and other
installment sales laws. CarMax believes that it is currently in substantial
compliance with all such laws affecting its business. Any failure to comply with
such laws or any adverse change in such laws, whether by the adoption of new
laws, changes in the interpretation of existing laws or CarMax's entrance into
jurisdictions with more stringent regulatory requirements, could have a material
adverse effect on the business, results of operations and financial condition of
CarMax.
DILUTION
Purchasers of the CarMax Stock in the Offering will experience an immediate
and substantial dilution in the net tangible book value of their shares. See
"Dilution."
FACTORS RELATING TO THE CARMAX STOCK
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE GROUP COULD AFFECT THE
OTHER
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareholders' equity between the CarMax Group and
the Circuit City Group for the purpose of preparing their respective financial
statements, holders of CarMax Stock and Circuit City Stock will be shareholders
of the Company and will continue to be subject to all of the risks associated
with an investment in the Company and all of its businesses, assets and
liabilities. Such allocation and the change in the equity structure of the
Company resulting from the implementation of the CarMax Stock Proposal will not
affect title to the assets or responsibility for the liabilities of the Company
or any of its subsidiaries and, therefore, will not affect the rights of holders
of any debt of the Company or its subsidiaries. Financial impacts arising from
the Circuit City Group that affect the Company's results of operations or
financial condition could affect the results of operations or financial
condition of the CarMax Group and the market price of the CarMax Stock. In
addition, any net losses of the Circuit City Group and dividends or
distributions on, or repurchases of, Circuit City Stock will reduce the legally
available funds of the Company available for payment of dividends on the CarMax
Stock. Accordingly, the Company's consolidated financial information should be
read in conjunction with the CarMax Group financial information.
The Company will provide to holders of CarMax Stock financial statements,
management's discussion and analysis of financial condition and results of
operations, business descriptions and other information for each Group and for
the consolidated Company. The financial statements of the CarMax Group will
reflect the financial position, results of operations and cash flows of the
businesses included therein. Consistent with the Amended Articles and relevant
policies, the CarMax Group's financial statements will also include allocated
portions of the Company's corporate assets and liabilities (including contingent
liabilities) that are not separately identified with the operations of a
specific Group. See "Certain Management and Allocation Policies" and the
financial information of the CarMax Group and the Company set forth herein.
LIMITED SEPARATE SHAREHOLDER VOTING RIGHTS; EFFECTS ON VOTING POWER
Holders of CarMax Stock and Circuit City Stock will have only the rights
customarily held by common shareholders of the Company and will not have any
rights related to their corresponding Group or have any right to vote on matters
as a separate voting group other than in limited circumstances as provided under
the Virginia Stock Corporation Act ("VSCA"). Under the VSCA, the holders of
CarMax Stock and Circuit City Stock will vote together as a single voting group,
except as to certain mergers and statutory share exchanges and certain
amendments to the Articles. Accordingly, if a separate vote on a matter by the
holders of either the CarMax Stock or Circuit City Stock is not required under
the VSCA, and if the Board of Directors does not require a separate vote, any
series that is entitled to more than the number of votes required to approve
such matter will be in a position to control the outcome of the vote on such
matter even if the matter involved a divergence or the appearance of a
divergence of the interests between the holders of the CarMax Stock and Circuit
City Stock. Conversely, if a separate vote on a matter by the holders of either
CarMax Stock or Circuit City Stock is required under the VSCA or by the Board of
Directors, the holders of either the CarMax Stock or Circuit City Stock could
prevent approval of such matter, notwithstanding the fact that the holders of a
majority or more than two-thirds, as applicable, of the total number of votes
entitled to be cast with respect to both the CarMax Stock and Circuit City Stock
had voted in favor of it. See "Description of Capital Stock -- Voting Rights"
and " -- Potential Diverging Interests -- Allocation of Proceeds of Mergers or
Statutory Share Exchanges."
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The relative voting power of shares of CarMax Stock and Circuit City Stock
will fluctuate from time to time, with each share of Circuit City Stock having
one vote and each share of CarMax Stock having a variable number of votes, based
upon the ratio, over a specified period, of the time-weighted average Market
Value of one share of CarMax Stock to the time-weighted average Market Value of
one share of Circuit City Stock. This formula is intended to equate the
proportionate voting rights of each series of Common Stock to their respective
Market Values at the time of any vote. The Company anticipates that the Circuit
City Stock will initially represent a substantial majority of the voting power
of all the Company's stock entitled to vote in the election of directors. Market
Value could be influenced by many factors, including the results of operations
of the Company and each of the Groups, trading volume, share issuances and
repurchases and general economic and market conditions. See "Description of
Capital Stock -- Voting Rights." Changes in the aggregate votes or relative
voting power of the CarMax Stock could result from the market's reaction to a
decision by the Company's management or Board of Directors that is perceived to
disparately affect one series of Common Stock in comparison to the other or the
issuance or repurchase of shares of Common Stock of either series. See
" -- Limited Approval Rights of Future Issuances."
FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS; NO DEFINITIVE PRECEDENT UNDER
VIRGINIA LAW
Under Virginia law, each member of the Board of Directors must act in
accordance with his or her good faith business judgment of the best interests of
the Company, taking into consideration the interests of all common shareholders.
As further described below, the existence of separate series of Common Stock may
give rise to occasions when the interests of the holders of CarMax Stock and the
holders of Circuit City Stock may diverge or appear to diverge. Although the
Company is not aware of any precedent concerning the manner in which principles
of Virginia law would be applied in the context of the capital structure
contemplated by the CarMax Stock Proposal, principles of Virginia law provide
that directors must act in accordance with their good faith business judgment of
the corporation's best interests, taking into consideration the interests of all
common shareholders regardless of class or series. Under these principles of
Virginia law, a good faith determination made by a disinterested and adequately
informed Board of Directors with respect to any matter having a disparate impact
upon the holders of CarMax Stock and the holders of Circuit City Stock would be
a defense to any challenge to such determination made by or on behalf of either
group of holders. Nevertheless, a Virginia court hearing a case involving such a
challenge may decide to apply principles of Virginia law other than those
discussed above, or may fashion new principles of Virginia law, in order to
decide such a case, which would be a case of first impression. There may arise
circumstances involving a divergence of interests in which the Board of
Directors is held to have properly discharged its duty to act in accordance with
its good faith business judgment of the best interests of the Company, but in
which holders of either the CarMax Stock or the Circuit City Stock consider
themselves to be disadvantaged relative to the other series. In such a case,
such holders would not have any other remedy under Virginia law with respect to
the circumstances giving rise to the divergence of interests.
Disproportionate ownership interests of members of the Board of Directors
in the CarMax Stock and the Circuit City Stock or disparate values of the CarMax
Stock and the Circuit City Stock could create or appear to create potential
conflicts of interest when directors are faced with decisions that could have
different implications for the different series. See " -- Potential Diverging
Interests."
POTENTIAL DIVERGING INTERESTS
The existence of separate series of Common Stock could give rise to
occasions when the interests of the holders of CarMax Stock and holders of
Circuit City Stock diverge or appear to diverge. Examples include determinations
by the Board of Directors to (i) pay or omit the payment of dividends on CarMax
Stock or Circuit City Stock, (ii) allocate consideration to be received by
holders of each of the series of Common Stock in connection with a merger or
consolidation involving the Company, (iii) convert one series of Common Stock
into shares of the other series of Common Stock, (iv) approve certain
dispositions of assets attributed to any Group, (v) so long as there is an
Inter-Group Interest, allocate the proceeds of issuances of CarMax Stock either
to the Circuit City Group in respect of its Inter-Group Interest or to the
CarMax Group and (vi) make operational and financial decisions with respect to
one Group that could be considered to be detrimental to the other Group,
including whether to make transfers of funds between Groups, as described below.
When making decisions with regard to matters that create potential diverging
interests, the Board of Directors would act in accordance with the terms of the
Articles, the management and allocation policies described in "Certain
Management and Allocation Policies" to the extent applicable and its fiduciary
duties. See " -- Fiduciary Duties of the Board of Directors; No Definitive
Precedent Under Virginia Law." The Board of Directors could also from time to
time refer matters involving such conflict issues to an existing committee or
one or more new committees of the Board of Directors and have such committee or
committees report to the Board of Directors on such matters or decide such
matters to the extent permitted by the Bylaws and applicable law. Each of the
foregoing potential conflicts of interests is discussed below:
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NO ASSURANCE OF PAYMENT OF DIVIDENDS. The Board of Directors currently does
not intend to pay dividends on the CarMax Stock. The Board of Directors
currently intends to pay dividends on the Circuit City Stock at a quarterly rate
of 3.5(cents) per share. Determinations as to the future dividends on the CarMax
Stock and the Circuit City Stock would be based primarily upon the financial
condition, results of operations and business requirements of the relevant Group
and the Company as a whole. Dividends on the CarMax Stock and the Circuit City
Stock, if any, would be payable out of the lesser of (i) all assets of the
Company legally available for the payment of dividends and (ii) the Available
Dividend Amount with respect to the relevant Group. Subject only to such
limitations, the Board of Directors reserves the right to declare and pay
dividends on either series of the Common Stock in any amount and could, in its
sole discretion, declare and pay dividends exclusively on the CarMax Stock,
exclusively on the Circuit City Stock or on both, in equal or unequal amounts,
notwithstanding the relative amounts of the CarMax Group Available Dividend
Amount and the Circuit City Group Available Dividend Amount, the amount of prior
dividends declared on each series, the respective voting or liquidation rights
of each series or any other factor. In addition, net losses of the Circuit City
Group, dividends and distributions on Circuit City Stock or any Preferred Stock
and repurchases of Circuit City Stock or certain preferred stock would reduce
the assets of the Company legally available for future dividends on the CarMax
Stock. See "Dividend Policy" and "Description of Capital Stock -- Dividends."
ALLOCATION OF PROCEEDS OF MERGERS OR STATUTORY SHARE EXCHANGES. The Amended
Articles do not contain any provisions governing how consideration to be
received by holders of Common Stock in connection with a merger or statutory
share exchange involving the entire Company is to be allocated among holders of
different series of Common Stock. In any such merger or statutory share
exchange, the percentage of the consideration to be allocated to holders of any
series of Common Stock will be determined by the Board of Directors and may be
materially more or less than that which might have been allocated to such
holders had the Board of Directors chosen a different method of allocation. See
" -- Limited Separate Shareholder Voting Rights; Effects on Voting Power."
OPTIONAL CONVERSION OF SERIES OF COMMON STOCK. The Board of Directors
could, in its sole discretion, determine to convert shares of the series of
Common Stock of one Group into shares of the series of Common Stock of the other
Group at a 15% premium at any time or a 10% premium following any dividend or
partial redemption undertaken in connection with a disposition of all or
substantially all of the properties or assets attributed to the Group whose
stock is being converted. Any such determination could be made at a time when
either or both of the CarMax Stock and the Circuit City Stock may be considered
to be overvalued or undervalued. Any conversion of Circuit City Stock into
CarMax Stock at any premium would dilute the interests in the Company of the
holders of CarMax Stock. In addition, any such conversion of either series of
Common Stock into the other would preclude holders of both series of Common
Stock from retaining their investment in a security that is intended to reflect
separately the performance of the relevant Group. If CarMax Stock were converted
into Circuit City Stock, holders of shares of the CarMax Stock could receive a
greater or lesser premium than any premium that might be paid by a third-party
buyer of all or substantially all of the assets attributed to the CarMax Group.
In determining whether to convert one series of Common Stock into the other
series of Common Stock, the Board of Directors would act in accordance with its
good faith business judgment that any such conversion is in the best interests
of the Company, taking into consideration the interests of all common
shareholders, including both the holders of the series of Common Stock being
converted and the holders of the series of Common Stock into which it is to be
converted. See "Description of Capital Stock -- Conversion and Redemption."
DISPOSITIONS OF GROUP ASSETS. Assuming the assets attributed to any Group
represent less than substantially all of the properties and assets of the
Company, the Board of Directors could, in its sole discretion and without
shareholder approval, approve sales and other dispositions of any amount of the
properties and assets attributed to such Group, because Virginia law and the
Amended Articles would require shareholder approval only for a sale or other
disposition of all or substantially all of the properties and assets of the
entire Company. The proceeds from any such disposition would be assets
attributed to such Group and used for its benefit, subject to the management and
allocation policies described under "Certain Management and Allocation
Policies." The Amended Articles will contain provisions that, in the event of a
Disposition of all or substantially all of the properties and assets attributed
to any Group, other than in a Related Business Transaction, require the Company
to (i) distribute to holders of the series of Common Stock relating to the Group
subject to such Disposition an amount in cash and/or securities or other
property equal to their proportionate interest in the Fair Value of the Net
Proceeds of such Disposition either by special dividend or redemption of all or
part of the shares of such series of Common Stock or (ii) convert the
outstanding shares of such Common Stock into a number of shares of the series of
Common Stock relating to the other Group equal to 110% of the ratio, calculated
over a period of time, of the average Market Value of one share of the Common
Stock relating to the Group subject to such Disposition to the average Market
Value of one share of Common Stock relating to the other Group. See "Description
of Capital Stock -- Conversion and Redemption." The terms of the Common Stock do
not require the Board of Directors to select the option that would result in the
distribution with the highest value to
20
<PAGE>
the holders of the Common Stock relating to the Group subject to such
Disposition or with the smallest effect on the Common Stock relating to the
other Group. The Board of Directors would select an option based upon its good
faith business judgment that such option is in the best interests of the
Company, taking into consideration the interests of all common shareholders. See
" -- Fiduciary Duties of the Board of Directors; No Definitive Precedent under
Virginia Law."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF CARMAX STOCK. If the Circuit City
Group, at the time the Company issues any shares of CarMax Stock, holds an
Inter-Group Interest representing an interest in the equity value of the CarMax
Group, the Board of Directors would, in its sole discretion, determine whether
to allocate all or any portion of the proceeds of such issuance to the CarMax
Group or to the Circuit City Group. To the extent the net proceeds of such
issuance of shares of CarMax Stock are allocated to the CarMax Group, the
financial statements of the CarMax Group would reflect the receipt of such
proceeds. To the extent such net proceeds are allocated to the Circuit City
Group, the financial statements of the Circuit City Group would reflect a
reduction in the Inter-Group Interest and the receipt of such proceeds. Any such
allocation may favor one Group at the expense of the other. For example, the
decision to allocate proceeds to the Circuit City Group may adversely affect the
ability of the CarMax Group to obtain funds. Any such allocation will be made by
the Board of Directors in its good faith business judgment that such allocation
is in the best interests of the Company, taking into consideration the interests
of all common shareholders. See " -- Fiduciary Duties of the Board of Directors;
No Definitive Precedent Under Virginia Law." In addition, if the Company issues
shares of CarMax Stock for the account of the Circuit City Group in respect of
the Circuit City Group's Inter-Group Interest in the CarMax Group, the voting
power of holders of shares of CarMax Stock immediately prior to such issuance
would be diluted even though no consideration received for such shares would be
allocated to the CarMax Group.
OPERATIONAL AND FINANCIAL DECISIONS. The Board of Directors could, in its
sole discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of the CarMax
Group and the Circuit City Group, such as transfers of services, funds or assets
between Groups and other inter-Group transactions, the allocation of financing
opportunities in the public markets and the allocation of business
opportunities, resources and personnel that may be suitable for both Groups. Any
such decision may favor one Group at the expense of the other. For example, the
decision to obtain funds for the Circuit City Group may adversely affect the
ability of the CarMax Group to obtain funds sufficient to implement its growth
strategies. All such decisions will be made by the Board of Directors in its
good faith business judgment or in accordance with procedures and policies
adopted by the Board of Directors from time to time, including the policies
described under "Certain Management and Allocation Policies," to ensure that
such decisions will be made in a manner consistent with the best interests of
the Company, taking into consideration the interests of all common shareholders.
For further discussion of potential divergence of interests, see " -- Fiduciary
Duties of the Board of Directors; No Definitive Precedent Under Virginia Law,"
" -- Allocation of Financing Costs; Transfers of Funds Between Groups; Equity
Contributions" and "Certain Management and Allocation Policies."
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE
The Company's policies described herein with respect to dividends, the
allocation of corporate expenses, assets and liabilities, the allocation of
proceeds of sales of CarMax Stock and Circuit City Stock and other matters may
be modified or rescinded, or additional policies may be adopted, in the sole
discretion of the Board of Directors without approval of the shareholders,
although the Board of Directors has no present intention to do so. Any
determination of the Board of Directors to modify or rescind such policies, or
to adopt additional policies, including any such decision that would have
disparate impacts upon holders of CarMax Stock and holders of Circuit City
Stock, would be made in accordance with the Board of Director's good faith
business judgment of the best interests of the Company, taking into
consideration the interests of all common shareholders. See " -- Potential
Diverging Interests."
ALLOCATION OF FINANCING COSTS; TRANSFERS OF FUNDS BETWEEN GROUPS; EQUITY
CONTRIBUTIONS
As described under "Certain Management and Allocation Policies," most
financial activities will be managed by the Company on a centralized basis. Such
financial activities include the investment of surplus cash, the issuance and
repayment of short-term and long-term debt and the issuance and repurchase of
any Preferred Stock. In the event that cash or other property allocated to one
Group is transferred to the other Group (other than transfers made with respect
to the Inter-Group Interest upon the payment of any dividend or other
distribution on CarMax Stock), such transfer would be accounted for in one of
the following ways, as determined by the Board of Directors: (i) as a
reallocation of pooled debt, as described under the caption referred to above,
or Preferred Stock, (ii) as an increase or decrease in the Number of Shares
Issuable with Respect to the Inter-Group Interest, (iii) as a sale of assets
between the two Groups, or (iv) as a short-term or long-term loan from one Group
to the other Group. There are no specific criteria to determine which of the
foregoing would be applied to a
21
<PAGE>
particular transfer of cash or property from one Group to the other Group. Such
determination would be made by the Board of Directors in the exercise of its
business judgment based upon all relevant circumstances, including the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
Any such determination could affect the amount of interest or dividend expense
reflected in the financial statements of the CarMax Group. All transfers of
material assets from one Group to the other Group will be deemed to be made on a
fair value basis for the foregoing purposes, as determined by the Board of
Directors.
A portion of the Company's debt and any Preferred Stock may be allocated to
each Group, and interest or dividend expense will be charged to each Group,
based on the weighted average interest or dividend rate of such pooled debt or
Preferred Stock. As a result, changes in the amount of pooled debt or Preferred
Stock would affect such weighted average interest or dividend rate and,
therefore, would affect the interest or dividend expense charged to both Groups
in respect of their allocated portions. In addition, if the CarMax Group obtains
its financing through increases of its allocated pooled debt or Preferred Stock
balance, the CarMax Group would receive a "benefit" or "detriment" to the extent
such weighted average rate is lower or higher, respectively, than the market
rate for a hypothetical borrowing of debt or issuance of Preferred Stock by the
CarMax Group if the CarMax Group were a stand-alone corporation. Debt and
Preferred Stock of the Company also may be allocated in its entirety to one
Group as determined by the Board of Directors.
The Board of Directors could, in its sole discretion, determine that a
transfer of cash or other property from one Group to the other Group should be
accounted for as a short-term or long-term loan. The Board of Directors would
establish the terms on which loans between the Groups would be made, including
interest rate, amortization schedule, maturity and redemption terms. In the
event that the Board of Directors determines that a transfer of funds from the
Circuit City Group to the CarMax Group should be accounted for as a loan, the
CarMax Group would receive a "benefit" or "detriment" to the extent the rate
determined by the Board of Directors is lower or higher, respectively, than the
market rate for a hypothetical borrowing of debt by the CarMax Group if the
CarMax Group were a stand-alone corporation.
The Board of Directors also could, in its sole discretion, determine from
time to time to contribute, as additional equity, cash or other property of the
Circuit City Group to the CarMax Group, thereby increasing the Inter-Group
Interest. Similarly, the Board of Directors could, in its sole discretion,
determine from time to time to transfer cash or other property from the CarMax
Group to the Circuit City Group as a reduction in such equity, thereby
decreasing the Inter-Group Interest. Although any increase in the Inter-Group
Interest resulting from an equity contribution by the Circuit City Group to the
CarMax Group or any decrease in the Inter-Group Interest resulting from a
transfer of funds from the CarMax Group to the Circuit City Group would be
determined by reference to the then current Market Value of CarMax Stock, such
changes could occur at a time when such shares could be considered undervalued
or overvalued. The holders of outstanding shares of CarMax Stock would not have
an opportunity to participate in a similar transaction.
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS ATTRIBUTED TO A GROUP
The terms of the Common Stock provide that upon a Disposition of all or
substantially all of the properties and assets attributed to any Group, the
Company would be required, subject to certain exceptions, either to pay a
special dividend on, or redeem some or all of, the outstanding shares of the
series of Common Stock relating to such Group or convert such Common Stock into
shares of the series of Common Stock relating to the other Group. If the CarMax
Group were instead a separate, independent company and its shares were acquired
by another person, certain costs of a Disposition relating to the CarMax Group,
including corporate level taxes, might not be payable in connection with such an
acquisition. As a result, the consideration that would be received by
shareholders of such a separate independent company in connection with such an
acquisition might be greater than the Fair Value of the Net Proceeds that would
be received by holders of the CarMax Stock if the assets attributed to the
CarMax Group were sold. In addition, no assurance can be given that the Net
Proceeds per share of the CarMax Stock to be received in connection with any
such Disposition of all of the assets attributed to the CarMax Group will be
equal to or more than the market value per share of the CarMax Stock prior to or
after announcement of such Disposition. See "Absence of Prior Market for CarMax
Stock; Possible Volatility of Stock Price" and "Description of Capital Stock --
Conversion and Redemption -- Mandatory Dividend, Redemption or Conversion of
Common Stock."
LIMITED APPROVAL RIGHTS OF FUTURE ISSUANCES
The approval of the shareholders of the Company will not be solicited by
the Company for the issuance from the authorized but unissued shares of CarMax
Stock or Circuit City Stock (including from shares that were previously
designated as part of the other series but are unissued) unless such approval is
deemed advisable by the Board of Directors or is required by stock exchange
regulations or under the VSCA.
22
<PAGE>
LIMITATIONS ON POTENTIAL ACQUISITIONS OF THE CARMAX GROUP
If the CarMax Group were organized as a stand-alone corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding stock of such corporation by means of a
tender offer or proxy contest. Although the CarMax Stock is intended to reflect
the separate performance of the CarMax Group, a person interested in acquiring
only the CarMax Group without negotiation with the Company's management would
still be required to seek control of the voting power represented by all of the
outstanding capital stock of the Company, including the Circuit City Stock. See
" -- Limited Separate Shareholder Rights; Effects on Voting Power" and
"Description of Capital Stock -- Voting Rights."
ABSENCE OF PRIOR MARKET FOR CARMAX STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
CarMax Stock. Although the CarMax Stock will be listed on the New York Stock
Exchange ("NYSE"), there can be no assurance that a regular trading market for
the CarMax Stock will develop after the Offering or, if developed, that it will
be sustained following the Offering. Similarly, no assurance can be given that
the CarMax Stock will continue to be listed on the New York Stock Exchange. The
initial public offering price of the CarMax Stock offered hereby will be
determined through negotiations between CarMax and the Underwriters and may not
necessarily bear any relationship to the price at which the CarMax Stock will
trade after completion of the Offering, or to the book value, assets, past
operating results, or financial condition of CarMax or to any other established
criteria of value. Because CarMax will be one of the first public companies
dedicated primarily to the used-vehicle retail business, the Underwriters will
be limited in their ability to use the market prices of other companies in the
same industry as a benchmark in setting the initial public offering price. See
"Underwriters."
The CarMax Stock is intended to reflect the performance of the CarMax
Group. Because there is no public market for the CarMax Stock, there can be no
assurance that the market price of the CarMax Stock will reflect the performance
of the CarMax Group or that the performance of the Circuit City Group would not
affect the market price of the CarMax Stock. In addition, the Company cannot
predict the impact on the market price of certain terms of the CarMax Stock or
Circuit City Stock, including the respective redemption and conversion rights
applicable upon the disposition of substantially all the assets attributed to
either Group, the ability of the Company to convert shares of one series of
Common Stock into shares of the other series of Common Stock, the discretion of
the Board of Directors to make various determinations relating to the separate
series, or the availability of additional shares of CarMax Stock for future
sale, including shares of CarMax Stock attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group.
Sales of substantial amounts of CarMax Stock by the Company or others in
the public market following the Offering, or the perception that such sales may
occur, could adversely affect the market price of the CarMax Stock. Any issuance
of additional shares of CarMax Stock may be authorized by the Board of Directors
from time to time from the authorized but unissued shares of Common Stock
(including from shares that were previously designated as Circuit City Stock but
are unissued) without shareholder approval unless such approval is deemed
advisable by the Board of Directors or is required by stock exchange regulations
or under the VSCA. In connection with the Offering, the Company has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not offer, sell, contract to sell or otherwise dispose of any shares of CarMax
Stock, or any securities convertible into or exchangeable for CarMax Stock, for
a period of 180 days after the date of this Prospectus, subject to certain
exceptions.
As a result of all of these factors, as well as other factors common to
initial public offerings, the market price could fluctuate substantially from
the offering price.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the CarMax Stock offered
hereby are estimated to be approximately $338.4 million ($389.4 million if the
U.S. Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and estimated offering expenses based upon an assumed
initial public offering price of $19 per share.
The shares of CarMax Stock offered hereby will be issued for the account of
the CarMax Group. The Company intends to use the net proceeds to finance part of
the Company's expansion plans for the CarMax Group and to repay the CarMax
Group's allocated portion of Company indebtedness. For more information on how
the Company intends to obtain future financing for its expansion plans for the
CarMax Group, see "CarMax Group Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Financial Condition -- Liquidity and
Capital Resources." As of November 30, 1996, the CarMax Group had total debt
outstanding of $172 million (consisting of its allocated portion of Company
indebtedness) with an effective interest rate of 6.25% per annum. Such debt was
incurred by the Company primarily to finance CarMax's growth to date. As of
January 9, 1997, the Company's indebtedness to be repaid with the net proceeds
from the Offering had a weighted average interest rate of 5.53% per annum with
varying final maturities up to five years from the date hereof. Most financial
activities of the Company, including its cash management, are managed centrally.
Pending its use by the CarMax Group, that part of the net proceeds that is to be
used to finance expansion of CarMax may be used to make a temporary
interest-bearing loan to the Circuit City Group and used to repay short-term
bank borrowings allocated to the Circuit City Group. See "Certain Management and
Allocation Policies."
DIVIDEND POLICY
The Company does not currently anticipate paying dividends on the CarMax
Stock in the foreseeable future but intends to retain future earnings, if any,
for the expansion of the business of the CarMax Group. The Company currently
intends to pay dividends on the Circuit City Stock at a quarterly rate of 3.5
cents per share. While the Company does not currently intend to change the
dividend policies referred to above, it reserves the right to do so at any time
and from time to time.
Subject to the limitations with respect to dividends on the CarMax Stock
and the Circuit City Stock described below under "Description of Capital
Stock -- Dividends," the Board of Directors would be able, in its sole
discretion, to declare and pay dividends exclusively on the CarMax Stock,
exclusively on the Circuit City Stock, or on both, in equal or unequal amounts,
notwithstanding the relative amounts of the CarMax Group Available Dividend
Amount and the Circuit City Group Available Dividend Amount, the amount of prior
dividends declared on each series, the respective voting or liquidation rights
of each series or any other factor.
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<PAGE>
CAPITALIZATION
The table below for the CarMax Group sets forth the capitalization of the
CarMax Group as of November 30, 1996 and as adjusted to give effect to the
Offering and the application of a portion of the net proceeds to repay the
CarMax Group's allocated portion of Company indebtedness. The table below for
the Company sets forth the total consolidated capitalization of the Company as
of November 30, 1996 and as adjusted to give effect to (a) the Offering and the
application of a portion of the net proceeds to repay the CarMax Group's
allocated portion of Company indebtedness and (b) the Common Stock
Redesignation.
CARMAX GROUP
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C>
(IN MILLIONS)
Short-term debt.................................................. $ 99.7 $ --
Long-term debt................................................... 72.6 --
-------- -----------
Total debt..................................................... 172.3 --
Accumulated group equity (deficit)............................... (15.7) 322.7
-------- -----------
Total capitalization........................................... $ 156.6 $ 322.7
-------- -----------
-------- -----------
</TABLE>
THE COMPANY
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C>
(IN MILLIONS)
Short-term debt.................................................. $ 593.2 $ 493.4
Current installments of long-term debt........................... 1.5 1.5
Long-term debt, excluding current installments................... 430.0 357.4
-------- -----------
Total debt.................................................. 1,024.7 852.3
-------- -----------
Stockholders' equity:
CarMax Stock................................................... -- 9.4
Circuit City Stock............................................. -- 49.0
Existing common stock.......................................... 49.0 --
Capital in excess of par value................................. 100.3 429.3
Retained earnings.............................................. 983.2 983.2
-------- -----------
Total stockholders' equity.................................. 1,132.5 1,470.9
-------- -----------
Total capitalization........................................ $2,157.2 $ 2,323.2
-------- -----------
-------- -----------
</TABLE>
25
<PAGE>
DILUTION
At November 30, 1996, the CarMax Group had a negative net tangible book
value of approximately $15.7 million or $.21 per share equivalent. "Net tangible
book value per share equivalent" at any date represents the amount of the CarMax
Group's tangible assets less total liabilities, divided by the sum of (i) the
Number of Shares Issuable with Respect to the Inter-Group Interest plus (ii) the
number of shares of CarMax Stock outstanding on such date. After giving effect
to the sale by the Company for the account of the CarMax Group of 18,860,000
shares of CarMax Stock in the Offering (at an assumed initial public offering
price of $19.00 per share) and after deducting underwriting discounts and
estimated offering expenses, the CarMax Group's pro forma net tangible book
value at November 30, 1996 would have been $322.7 million or $3.42 per share
equivalent. This represents an immediate increase in the net tangible book value
of the CarMax Group of $3.63 per share equivalent to the Circuit City Group and
an immediate dilution of $15.58 per share equivalent to new investors purchasing
shares of CarMax Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share..................................... $ 19.00
Net tangible book value per share equivalent at November 30, 1996................. $ (.21)
Increase per share equivalent attributable to new investors....................... $ 3.63
--------
Pro forma net tangible book value per share equivalent after the Offering........... $ 3.42
--------
Dilution per share equivalent to new investors (1).................................. $ 15.58
--------
--------
</TABLE>
- ---------------
(1) If the U.S. Underwriters' over-allotment option is exercised in full, the
pro forma net tangible book value per share equivalent after the Offering
would be $3.85 and dilution per share equivalent to new investors would be
$15.15.
The foregoing computation excludes 4,781,808 shares reserved for issuance
upon the exercise of the CarMax Stock Options, which have a weighted average
exercise price of $.51 per share. Assuming that all such options were exercised
at November 30, 1996, the pro forma net tangible book value per share equivalent
after the Offering would be $3.28 and the dilution per share equivalent to new
investors would be $15.72. Of these 4,781,808 shares, 1,400,000 are reserved for
issuance upon the exercise of CarMax Stock Options held by officers of the
Company at a weighted average exercise price of $.18 per share. If all of the
CarMax Stock Options were exercised in full, (i) the aggregate exercise price
paid by the holders thereof would be $2,444,113 and the 4,781,808 shares of
CarMax Stock issued in connection with such exercise would represent 4.8% of the
total share equivalents outstanding (4.7% if the U.S. Underwriters'
over-allotment option is exercised in full) and (ii) the shares of CarMax Stock
acquired by new investors in the Offering would represent 19.0% of the total
share equivalents outstanding (21.3% if the U.S. Underwriters' over-allotment
option is exercised in full).
26
<PAGE>
BUSINESS OF THE CARMAX GROUP
OVERVIEW
The CarMax Group is a leading retailer of used cars and light trucks in the
United States with six stores located in the Southeast and one vehicle
reconditioning center in Orlando, Florida. CarMax purchases, reconditions and
sells used vehicles at each of its stores and sells new vehicles at one of its
Atlanta, Georgia locations under a franchise agreement with Chrysler. CarMax
provides its customers with a full range of related services, including the
financing of vehicle purchases through its own financing unit, FNAC, and through
third parties, and the sale of service policies. Since opening the first store
in Richmond, Virginia in October 1993, CarMax retail operations have grown
rapidly, with total revenues of $77 million during the first full fiscal year
and $375 million for the nine months ended November 30, 1996. CarMax has
launched an aggressive, six-year rollout plan under which it plans to open one
additional store in Tampa, Florida by the end of fiscal 1997, eight to 10 stores
in fiscal 1998 and 15 to 20 stores each year thereafter through fiscal 2002.
CarMax was established in 1993 by the Company, a leading U.S. consumer
electronics retailer, to revolutionize the highly fragmented used-vehicle retail
market which was estimated at $294 billion in 1995. CarMax was created as a
result of the Company's desire to develop a growth vehicle to sustain the
Company's growth beyond the end of the decade. CarMax was the first used-vehicle
retailer to offer a large selection of quality used vehicles at low, fixed
prices using a customer-friendly sales process in an attractive, modern sales
facility. CarMax has designed a strategy to better serve this market by
addressing the major sources of dissatisfaction with traditional used-car
retailing and to maximize operating efficiencies with sophisticated systems and
standardized operating procedures and store formats. The Circuit City Group's
focus on customer satisfaction and operating efficiency has enabled it to become
one of the largest and most profitable consumer electronics companies in the
United States, with an ongoing and highly successful nationwide rollout of over
400 stores and a 10-year compound annual growth rate in sales and earnings of 26
percent and 27 percent, respectively, for the period ended February 29, 1996.
During the past three years CarMax has leveraged, and continues to leverage,
Circuit City's operational expertise, innovative systems and resources to refine
the used-vehicle retailing concept, to develop store prototypes and proprietary
systems and to implement effective financial and operational controls that now
enable CarMax to embark on an aggressive, nationwide rollout. In addition,
CarMax currently intends to add new-car franchises to some of its existing and
new locations as it grows and to expand its retail repair service operations
commencing in fiscal 1998.
Automotive retailing, with more than $596 billion in 1995 sales, is the
largest consumer retail market in the United States, representing nearly 8
percent of the U.S. gross domestic product. Used-vehicle sales in 1995 were
estimated at $294 billion, with approximately $232 billion in sales by
franchised and independent dealers and the balance in privately negotiated
transactions. CarMax believes that conditions in the used-vehicle retail market,
coupled with its operating and growth strategies, provide CarMax with an
opportunity for substantial growth.
OPERATING STRATEGIES
CarMax has pioneered and implemented operating strategies that enhance
customer satisfaction and loyalty and maximize operating efficiency. Since
opening its first store in Richmond, Virginia in October 1993, CarMax has
successfully implemented its operating model at five additional stores.
Excluding the Orlando, Florida store which opened November 6, 1996, each CarMax
store has been profitable during fiscal 1997 on a store-level basis including
profits from vehicle financing but before the allocation of Group overhead
expenses. After incurring significant startup, development and training expenses
relating to the development of the CarMax concept at the Richmond, Virginia
store during fiscal 1994 and 1995, the Richmond store became profitable in
fiscal 1996. Benefitting from the refinement of the CarMax concept at the
Richmond store, the two stores in Atlanta, Georgia and the store in Raleigh,
North Carolina all achieved such store-level profitability within the first full
year of operation and the store in Charlotte, North Carolina has been profitable
during the period since its opening in March 1996.
LOW, FIXED "NO-HAGGLE" PRICES
CarMax has implemented an every-day low price strategy under which it sets
fixed, "no-haggle" prices on its used and new vehicles. Most prices are at or
below the best negotiated price in the market. Used vehicles at CarMax are
generally priced from $500 to $1,000 below NADA average book value. Prices on
all vehicles are clearly displayed on each vehicle's price and information
sticker and in CarMax newspaper advertising.
27
<PAGE>
BROAD SELECTION OF HIGH-QUALITY VEHICLES
Each CarMax store features a broad selection of quality used cars and light
trucks with a wide range of prices appealing to a wide range of potential
customers. CarMax stores vary in inventory size from 400 to 1,200 vehicles
depending on local market size and consumer demand. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs -- the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 70,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 70,000 miles, with most priced in a range from $4,500 to $10,500. To
ensure that CarMax quality standards are maintained, vehicles under both
programs undergo a comprehensive, certified quality inspection by CarMax service
technicians. CarMax backs its commitment to quality with a five-day or 250-mile,
money-back guarantee and a free, 30-day comprehensive warranty on each vehicle.
EFFICIENT, CUSTOMER-FRIENDLY SALES PROCESS
CarMax has developed a streamlined, innovative sales process that redefines
the way consumers buy vehicles. CarMax believes that the major causes of
consumer dissatisfaction with the traditional car-buying experience include: (i)
dealers' attempts to combine the vehicle purchase transaction with the trade-in
transaction and the sale of related products; (ii) the confrontational
negotiations between the customer and the dealer; (iii) the difficulty the
customer experiences in obtaining sufficient information to make informed
decisions; (iv) interaction with multiple personnel at different stages of the
buying process; and (v) the hidden costs and inflated prices embedded in the
sales process. By contrast, the CarMax process enables customers to separately
evaluate each step of the sales process described below and to make informed
decisions at each step based on complete information about their options and
associated prices. To increase efficiency, the customer is assisted throughout
the CarMax sales process by the same sales consultant and by AutoMation, the
customer-friendly, point-of-sale system that is proprietary to CarMax.
(Bullet) SELECTION AND PRICE. Customers can use AutoMation to
electronically search an entire store's inventory for vehicles that meet
their model and feature requirements and price range. AutoMation displays a
color picture of each vehicle and optionally generates a vehicle
information sheet with the vehicle price and selected features for the
customer's reference and a map directing the customer to the vehicle's
location on the lot. Prices are clearly displayed, along with selected
vehicle features, on each vehicle's price and information window sticker.
The CarMax low, "no-haggle" price policy assures all customers the same low
price and avoids confrontational price negotiations with customers.
(Bullet) TRADE-INS. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any
vehicle, usually in 30 minutes or less, and provide the vehicle's owner
with a written guaranteed cash offer that is good for seven days or 250
miles. The appraisal process is available to everyone, whether or not they
are purchasing a vehicle from CarMax. In contrast to the approach of
traditional dealers who seek to combine the vehicle purchase and trade-in
transactions, the CarMax sales process enables the customer to separately
evaluate and make an informed decision with respect to each transaction.
(Bullet) FINANCING. The sales consultant uses AutoMation to
electronically submit financing applications and receive responses from
multiple lenders, generally in less than eight minutes. Customers are then
able to review online with the sales consultant financing options and terms
from each prime financing source that CarMax uses, including the amount
financed, interest rate, term and monthly payment. CarMax believes that, by
contrast, traditional dealers frequently offer inflated financing terms to
customers and do not clearly separate the components of the financing
transaction.
(Bullet) SERVICE POLICIES. CarMax offers primary and extended service
policies that have been custom-designed to its own specifications. CarMax
believes that superior coverage and low, fixed prices distinguish its
service policies from those of its competitors. Through AutoMation, the
customer can review online with the sales consultant all available service
policy options and costs and make an informed, unpressured decision. In
contrast, at many traditional dealers customers may feel pressured into
buying service policies they do not want at inflated prices.
(Bullet) FEES AND OPTIONS. CarMax does not charge processing,
administration, application or other "hidden" fees (as much as $400 at many
traditional auto dealers) and does not attempt to sell other options at
inflated prices. CarMax charges only state-required fees that are clearly
displayed on the vehicles and in the AutoMation system.
CarMax sales personnel play a significant role in ensuring a
customer-friendly sales process. All sales consultants, including both full and
part-time employees, are compensated solely on a commission basis. The amount of
the commission is a fixed dollar amount per vehicle sold. By contrast, sales and
finance personnel at traditional dealerships often receive higher commissions
for negotiating higher prices and for steering customers toward vehicles with
higher gross margins. Most
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of the CarMax sales consultants have had prior retail experience before joining
CarMax, and CarMax places great emphasis on integrity and customer-relations
skills in its hiring policies and training programs.
SOPHISTICATED INVENTORY MANAGEMENT SYSTEMS AND CONTROLS
Through its inventory management systems and controls, CarMax minimizes
inventory carrying costs. AutoMation, the central feature of the CarMax
inventory management and control system, enables each vehicle to be tracked
throughout the sales process. Using the information provided by AutoMation, and
applying sophisticated statistical modeling techniques, CarMax is able to
optimize its inventory mix and display by store, anticipate future inventory
needs at each store, evaluate sales consultant performance and refine its
vehicle pricing strategy. CarMax maintains strict inventory aging policies under
which it disposes of any vehicle that has not been sold at retail within
specified periods. Less than one percent of CarMax's retail inventory is
ultimately sold at wholesale.
INCREASED EFFICIENCY THROUGH STANDARDIZATION AND IMPLEMENTATION OF "BEST
PRACTICES"
Since opening its first store in 1993, CarMax has acquired significant
knowledge and experience in operating used-vehicle stores and continually
refines its selling and operating procedures and store prototypes in order to
improve operating efficiency and customer service. As a result of this
experience, CarMax has adopted and implemented the "best practices" throughout
all of its stores by standardizing the most efficient and optimal processes.
CarMax believes that standardization of best practices will enable it to become
a low-cost operator within its industry.
ATTRACTIVE, EFFICIENT STORE PROTOTYPES
The CarMax store format provides an open and attractive physical
environment that CarMax believes enhances its customer-friendly and efficient
sales process and creates a unique shopping experience. The stores are currently
built in three different prototypes, with inventory capacity ranging from 400 to
1,200 cars, depending upon local market size and consumer demand. CarMax has
successfully implemented each of these prototypes.
GROWTH STRATEGIES
CarMax believes its operating strategies and the extensive experience of
its senior management team will enable it to capitalize on the significant
opportunities available in the large, highly-fragmented automotive retailing
industry. CarMax intends to aggressively grow its business through (i) a rapid
rollout of used-vehicle stores; (ii) the expansion of retail repair service
operations; and (iii) the addition of selected new-vehicle franchises.
RAPID ROLLOUT OF USED-VEHICLE STORES
CarMax currently operates six stores, with one each in the Richmond,
Virginia; Raleigh, North Carolina; Orlando, Florida; and Charlotte, North
Carolina markets; and two in the Atlanta, Georgia market. As a result of the
successful operation of its existing stores, CarMax has launched an aggressive,
six-year rollout plan under which it opened one store in Orlando, Florida on
November 6, 1996, and plans to open one additional store in Tampa, Florida by
the end of fiscal 1997, eight to 10 stores in fiscal 1998 (with most opening in
the second half of fiscal 1998), including in the Atlanta, Georgia; Dallas,
Texas; Houston, Texas; South Florida; and Washington-Baltimore markets, and 15
to 20 stores each year thereafter through fiscal 2002. CarMax already has under
contract most of the sites that it plans to open in fiscal 1998. Under the
rollout plan, CarMax expects that it will experience a substantial increase both
in overall square footage and in display capacity, with square footage
increasing from 0.4 million square feet at the end of fiscal 1997 to between 4.6
and 5.9 million square feet at the end of fiscal 2002 and display capacity
increasing from 5,144 vehicles to between 51,000 and 66,000 vehicles over the
same period. In addition to growth from the opening of new stores, CarMax
expects that it will realize significant sales growth from comparable store
sales increases as newly opened stores mature. CarMax believes, based on current
trends, that each store will reach its planned mature sales and earnings
potential by the end of its fourth year. However, given the infrequent repeat
purchase cycle on vehicles, sales and earnings may continue to grow beyond this
initial ramp-up period.
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The following table sets forth information concerning the stores and
reconditioning centers that CarMax anticipates will be open by the end of fiscal
1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28 OR 29,
---------------------------------------------------
ACTUAL ESTIMATED
----------------------------- ------------------
1994 1995 1996 1997(1) 1998(2)
------- ------- ------- ------- -------
<S> <C>
Stores:
Opened............................................................... 1 1 2 3 9
Operating at Year-End................................................ 1 2 4 7 16
Total Building Space (sq. ft.)....................................... 32,578 72,586 196,048 388,534 971,197
Average Building Space per Store (sq. ft.)........................... 32,578 36,293 49,012 55,505 60,700
Total Display Capacity............................................... 509 1,109 2,909 5,144 11,222
Total Service Bays................................................... 19 36 93 194 464
Reconditioning Centers:
Total Service Bays................................................... -- -- -- 40 120
</TABLE>
- ---------------
(1) Includes Tampa, Florida store scheduled to open by the end of fiscal 1997.
(2) Based on the average of the range for facilities anticipated to be opened in
fiscal 1998.
CarMax is currently targeting 45 of the top 50 U.S. markets. These are the
markets where it believes the most favorable demographic characteristics exist
and prime real estate sites are available on reasonable terms and, accordingly,
where attractive economic returns can be achieved. In selecting sites for its
new stores within a particular market, CarMax first undertakes an extensive
analysis of demographic, cost and other factors similar to the analysis
undertaken by the Circuit City Group when selecting sites for its new stores.
Given the importance of a convenient location in the consumer's decision on
where to shop, CarMax expects that multiple stores will be opened in most major
markets and all will be located in high-visibility, high-traffic commercial
areas. The goal of CarMax is to open most, if not all, of its planned stores
within a particular market as close in time as possible in order to immediately
begin realizing economies of scale in advertising, inventory management and
overhead. Each new store and center will be integrated into the AutoMation
system before opening. To better match individual market demand, CarMax has
developed three store prototypes with different display capacities ranging from
400 to 1,200 vehicles. CarMax has successfully implemented each of these
prototypes. CarMax continually reevaluates its store prototypes and, when
appropriate, makes improvements to promote efficiency in store operations and
enhance customer convenience.
Most of the initial inventory for a new CarMax store is acquired through
auctions and fleet purchases approximately three to four weeks prior to the
scheduled store opening date. As a store matures, an increasing percentage of
the store's inventory is acquired through an appraisal process in which CarMax
appraises and makes an offer to purchase any properly documented vehicle from
the public. See " -- CarMax Used-Vehicle Operations -- Sourcing." All used
vehicles require some reconditioning prior to being sold at retail. Specialized
reconditioning centers, such as the facility that CarMax operates in Orlando,
Florida, provide additional flexibility, helping to balance work load peaks with
new store openings and seasonal fluctuations. See " -- CarMax Used-Vehicle
Operations -- Reconditioning."
Shortly before a store opens, CarMax initiates its distinctive marketing
program using television and radio advertising to establish brand name
recognition. Upon opening, CarMax supplements its television and radio
advertising with a major newspaper campaign. These frequent print advertisements
generally list every vehicle in the store's inventory, with prices.
Each CarMax store has a location general manager, who oversees all of the
store's operations and personnel, and several department managers who are
responsible for sales, operations and purchasing. The location general manager
and the department managers for a new store are typically hired at least one
year prior to the scheduled store opening date. During the period prior to
opening, these managers participate in a rigorous training program at CarMax
headquarters and the existing stores that rotates them through most key
departments and operations of the business. The new management team arrives at a
store site approximately two to three months prior to the scheduled opening date
and assists in planning for the new store's opening. CarMax believes that its
work environment and incentive compensation programs will enable it to attract
and retain qualified personnel in each market it enters.
EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. Retail repair service operations
have historically been a substantial source of dealer profitability,
representing approximately 43 percent of dealers' 1995 profits according to
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the NADA. Currently, CarMax uses its service facilities to inspect and
recondition used vehicles acquired for resale and to provide existing customers
with limited maintenance and light repair services. As part of the rollout of
used-vehicle stores, CarMax plans to open additional reconditioning centers that
will perform an increasing share of the inspection and reconditioning functions,
thereby freeing up repair facilities at the stores. Under the rollout plan,
CarMax expects that its total in-store service bays will increase from 194
expected at the end of fiscal 1997 to 2,580 expected at the end of fiscal 2002
(based on an average of the annual range for facilities planned to be opened
through fiscal 2002). CarMax is currently operating prototypes for this expanded
service at its Atlanta, Georgia retail locations and is developing systems and
procedures that are designed to offer the retail-repair customer an efficient,
customer-friendly process consistent with the process that CarMax has developed
for its vehicle sales operations.
ADDITION OF NEW-VEHICLE FRANCHISES
CarMax believes that new-vehicle operations present opportunities for
incremental revenues and operational and financial synergies when combined with
used-vehicle operations. CarMax currently operates a Chrysler franchise at one
of its Atlanta, Georgia locations. In less than five months of operation, that
franchise surpassed the annual planning volume established by Chrysler. Based on
its experience to date with the Atlanta location, CarMax believes the addition
of a new-vehicle franchise to a used-vehicle store should provide incremental
revenues and contribute to the store's operating profits (including profits from
vehicle financing but before the allocation of group overhead expenses) during
the first full year of franchise operation. CarMax intends to aggressively
pursue new-car franchises for its new and existing stores both through
acquisition of franchises within the territory of its store operations and
through new grants. CarMax plans to add more than 25 new car franchises to its
used-car operations over the initial phase of its rollout through fiscal 2002.
However, given the relative unavailability of new franchises and the limited
availability of franchises within a suitable radius of its existing and proposed
stores, as well as the uncertain future willingness of manufacturers to approve
these transactions, CarMax cannot assure that it will be able to achieve this
portion of its growth plan. CarMax has received initial indications from several
foreign and domestic manufacturers of their willingness to approve CarMax as a
franchisee. CarMax is continuing to explore opportunities with these
manufacturers, as well as with existing franchised dealerships.
INDUSTRY OVERVIEW
CarMax believes that its business strengths and growth strategies position
it to take advantage of the business opportunities now available in automotive
retailing. Based on NADA data and the "Vehicle Remarketing Directory (1996),"
automotive retailing, with more than $596 billion in 1995 sales, is the largest
consumer retail market in the United States, representing nearly 8 percent of
the U.S. gross domestic product. Used-vehicle sales in 1995 were estimated at
$294 billion, with approximately $232 billion in sales by franchised and
independent dealers and the balance in privately negotiated transactions. In
addition, 1995 retail sales of new vehicles, which are sold exclusively through
franchised dealers, were approximately $302 billion.
During the period from 1991 through 1995, used-vehicle sales grew at a
faster rate and were more profitable to dealers than new-vehicle sales. While
estimates from different sources vary, based on NADA data and the Vehicle
Remarketing Directory, used-vehicle unit sales through franchised dealers,
independent dealers and in privately negotiated transactions grew at an
estimated average annual rate of 8.2 percent during such period. From 1991 to
1994, used-vehicle unit sales grew at an estimated average rate of 9.0 percent
and in 1995 continued to grow at an estimated 5.6 percent. By contrast, after
growing at an average annual rate of 7.0 percent from 1991 through 1994,
new-vehicle unit sales declined 2.1 percent in 1995. Dealerships also typically
offer a range of other services and products, including repair and warranty
work, replacement parts, extended warranty coverage, financing and credit
insurance. In 1995, parts and service represented approximately 12.4 percent of
the average dealership's total sales revenue.
USED-VEHICLE SALES
The market for used-vehicle sales through retail outlets and in privately
negotiated transactions in the United States has increased over the past five
years. CarMax believes that the factors that have led to growth in used-vehicle
sales include the substantial increases in new-vehicle prices, which have
prompted a growing segment of the vehicle-buying population to purchase more
affordable used vehicles, and the greater reliability and durability of used
cars resulting from the production of higher-quality vehicles. The used-vehicle
market is extremely fragmented with approximately 22,750 franchised dealers
accounting for $127 billion in 1995 sales. CarMax believes an even greater
number of independent used-vehicle dealers accounted for $105 billion in 1995
sales. Privately negotiated transactions accounted for the remaining 1995 sales,
estimated at $62 billion. In 1995, the top 100 franchised dealer groups
accounted for less than two percent of used-vehicle sales.
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CarMax believes that the size and fragmented nature of the used-vehicle
industry and the historically high rate of customer dissatisfaction with the
traditional used-car sales process are conditions similar to those prevailing in
the consumer electronics retail business in the late 1970s and early 1980s.
Circuit City capitalized on those conditions by introducing its innovative
retailing format that led to a dramatic increase in its market share. CarMax
believes that current conditions in the used-vehicle industry offer similar
opportunities.
NEW-VEHICLE SALES
Over the past several decades, changes have occurred in the new-vehicle
retailing industry that CarMax believes could facilitate an expansion of its
new-vehicle operations. Since 1960, the number of franchised dealers has
declined approximately 35 percent to the current 22,750 level. CarMax believes
that further consolidation of franchised dealers is likely as megadealers
continue to put competitive pressures on undercapitalized dealers, individual
dealership owners reach retirement age and manufacturers continue to press for
greater efficiency in their distribution networks. Notwithstanding this trend,
the industry today remains highly fragmented, with few large dealers. According
to Automotive News, in 1995, the largest 100 dealer groups, each with more than
$140 million in total revenues, accounted for less than 10 percent of revenues
from new-car sales in the U.S. and controlled less than 5 percent of all
franchises.
CARMAX USED-VEHICLE OPERATIONS
VEHICLES
CarMax offers its customers a broad selection of makes and models of used
vehicles, including both domestic and foreign manufactured cars and light
trucks, at competitive prices. The most popular models at CarMax stores include
Toyota Camry, Honda Accord, Ford Taurus, Ford Ranger and Ford Escort. To appeal
to the vast array of consumer preferences and budgets, CarMax offers its used
vehicles under two programs -- the CarMax program and the ValuMax program.
CarMax vehicles generally are one to five years old, with less than 70,000
miles, and most are priced from $9,500 to $21,000. The average CarMax vehicle is
between two and three years old, with 28,000 miles, and is priced at $14,500.
Through the ValuMax program, CarMax sells high-quality vehicles that generally
are more than five years old and/or over 70,000 miles, with most priced in a
range from $4,500 to $10,500. The average ValuMax vehicle is between five and
six years old, with 84,000 miles, and is priced at $7,200. In fiscal 1996,
approximately 96.6 percent of the used vehicles sold by CarMax were under the
CarMax program. CarMax has found in surveys that low prices are the primary
reason most customers buy at CarMax. Most CarMax and ValuMax vehicles are priced
from $500 to $1,000 below NADA average book value. Approximately 80 percent of
all used vehicles sold by CarMax in 1995 were priced between $8,500 and $20,500.
CarMax performs a comprehensive, certified quality inspection of each
vehicle. The CarMax commitment to quality is demonstrated to the customer
through a five-day or 250 mile, money-back guarantee and a free, 30-day
comprehensive warranty. Each CarMax vehicle must pass a comprehensive certified
quality inspection that covers all major and minor mechanical systems and all
safety functions as well as cosmetic criteria. Each ValuMax vehicle must pass a
certified quality inspection covering most major mechanical systems and all
safety functions. For ValuMax, concentration is placed on providing good, basic,
mechanically-sound transportation and, therefore, cosmetic corrections or repair
of convenience and/or luxury items such as electric mirrors, electric antennas,
etc. are generally not performed.
SOURCING
CarMax acquires a significant proportion of its used-vehicle inventory
through its unique appraisal process. Unlike the traditional trade-in process,
trained specialists at each CarMax store evaluate any vehicle that is properly
documented, typically in less than 30 minutes, and make an offer to the owner
that is good for seven days or 250 miles (subject only to the vehicle remaining
in substantially the same condition). CarMax believes that this process enables
it to tap into the private market as a significant additional source for used
vehicles and that vehicles purchased directly from consumers, such as those
acquired through the appraisal process, represent the highest quality used
vehicles available in the market because they have been maintained by their
owners. According to the Vehicle Remarketing Directory, of the estimated 51.7
million used vehicles sold in 1995, approximately 51.5 percent of the units were
sold in privately negotiated transactions, including transactions between
related parties. Because its operating strategy is to build customer confidence
and satisfaction by offering only quality vehicles, CarMax resells at retail
only one-third of the vehicles acquired through the appraisal process. CarMax
sells those vehicles that do not meet its retail standards at its in-store
wholesale auctions, generally at cost.
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In addition to the appraisal process, CarMax acquires a significant
proportion of its used-vehicle inventory through auctions. Auction houses
facilitate the purchase and sale of vehicles sourced from dealers, rental and
fleet companies and wholesalers as well as off-lease vehicles, which accounted
for only 2.4 million unit sales in 1995, or 4.1 percent of total used-vehicle
unit sales, according to the "Vehicle Remarketing Directory." Most auctions are
open and can be attended by the entire dealer community; the remainder are
"closed" except to the franchised dealers of specific manufacturers. Mannheim
Auto Auction, Inc., the largest U.S. vehicle auctioneer, reports that
approximately 75 percent of all vehicles it auctioned in 1995 were sold at open
auctions. In addition to attending open auctions, CarMax can attend Chrysler's
closed auctions and purchase used vehicles for resale at the CarMax Chrysler
franchise in Atlanta, Georgia. CarMax regularly buys directly from other
traditional sources as well, including wholesalers, franchised and independent
dealers and fleet owners, such as leasing companies and rental companies.
All used vehicles are evaluated on the basis of their wholesale cost and
cost of reconditioning and, for purchases off-site from traditional sources,
cost of delivery to the reconditioning center and the store. Buyers based at the
stores, supported by regional buyers and headquarters staff, purchase most of
the CarMax inventory. Buyers at both the store and regional level, as well as
headquarters staff, rely on the extensive inventory and sales trend data
available through AutoMation. See " -- Vehicle Inventory Management"
and " -- Automated Systems."
CarMax utilizes an in-house training and mentoring program to develop
employees skilled in the distinctive CarMax approach to evaluating and
purchasing used vehicles. CarMax has found that individuals without prior
experience in automobile wholesaling are the most receptive to the skills and
values imparted by this training. Management believes that development of this
unique training program for buyers has provided CarMax with a competitive
advantage over its existing and potential competitors. All significant
purchasing decisions are made by trained personnel. CarMax uses data from
AutoMation to monitor and evaluate the performance of its buyers on an on-going
basis.
Based on consumer acceptance of the appraisal process at existing CarMax
stores and the experience and success of CarMax to date in acquiring vehicles
from traditional sources, CarMax believes that its sources of used vehicles will
continue to be sufficient to meet current needs and to support planned
expansion.
VEHICLE INVENTORY MANAGEMENT
The Circuit City Group has successfully designed and implemented
computer-based management systems to promote efficiency in inventory management
and improve profitability. See "Automated Systems." Leveraging the Circuit City
expertise in this area, CarMax developed and implemented AutoMation, a
sophisticated, computerized inventory management and point-of-sale system, that
is unique to the automobile retail business. This proprietary system allows
headquarters and store personnel to effectively manage vehicle inventory mix to
reflect local demand at each store and minimize inventory carrying costs. Parts
of the system can also be accessed directly by customers as a key component of
the customer-friendly CarMax shopping process. See " -- Operating
Strategies -- Efficient, Customer-Friendly Sales Process" and " -- Automated
Systems."
From the time CarMax appraises a used vehicle until the vehicle is sold,
all relevant information relating to that vehicle is entered into AutoMation.
This information includes the make, model and features of the vehicle, the
wholesale cost, the nature and cost of the reconditioning services performed,
the retail price, how long the vehicle has been on display and its location on
the lot. The system utilizes vehicle sensors and electronic gates erected around
each parking lot, as well as bar codes placed on each vehicle and on-site
parking place, in order to effectively track both vehicle location and movement
on and off the lot as well as test drives which are identified both by vehicle
and sales consultant. Using this information, and applying sophisticated
statistical modeling techniques, CarMax is able to optimize its inventory mix
and display, anticipate future inventory needs at each store, evaluate sales
consultant performance and refine its vehicle pricing strategy. To make
inventory decisions, CarMax supplements information provided by AutoMation with
data from customer and market surveys and from private and governmental reports
analyzing local, regional and national vehicle-purchasing trends.
The quality of inventory is reevaluated weekly by headquarters personnel
with respect to price, store and lot location and other factors and, if
warranted, appropriate adjustments to those factors are recommended to the
store's purchasing manager. CarMax currently turns its vehicle inventory
approximately nine times each year. Under its strict inventory aging policy,
CarMax disposes of any vehicle that has not been sold at retail within specified
periods. Less than one percent of CarMax's retail inventory is ultimately sold
at wholesale.
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RECONDITIONING
A key element of the CarMax operating strategy is to provide customers with
high-quality used vehicles and to reinforce customer confidence in that quality
through the CarMax five-day or 250-mile, money-back guarantee and free, 30-day
comprehensive warranty. To meet this quality commitment, all used vehicles sold
at retail by CarMax are subjected to a comprehensive certified quality
inspection. Based on this quality inspection, CarMax determines the
reconditioning necessary to bring the vehicle up to CarMax retail standards. All
vehicles sold to CarMax retail customers require some reconditioning. Vehicles
requiring more reconditioning than can be performed profitably are sold at
in-store wholesale auctions.
CarMax performs most routine mechanical and minor body repairs itself; for
major mechanical repairs as well as glass replacement and painting, CarMax
currently engages third parties specializing in those services. During the past
year, CarMax has been performing an increasing percentage of reconditioning
services in-house and, based on the cost savings realized, CarMax expects that
trend to continue.
Reconditioning services are currently performed at each store as well as at
a specialized center in Orlando, Florida dedicated to reconditioning vehicles
for sale at stores in the Florida, Georgia and North Carolina markets. To
support its planned rollout of used-vehicle stores, CarMax plans to open
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions. See " -- Growth Strategies -- Rapid
Rollout of Used-Vehicle Stores" and "Service and Parts." CarMax expects to
continue to provide reconditioning services at the stores, primarily for
vehicles acquired at the store locations (such as those acquired through the
appraisal process) or otherwise where the cost of transporting a vehicle to and
from the reconditioning center would exceed the savings to be achieved by
performing such services at a more efficient, specialized facility.
The reconditioning center in Orlando has approximately 40 service bays and
can recondition up to 2,000 vehicles per month. The existing CarMax stores have
a range of 17 to 40 service bays of which 10 to 20 are dedicated to
reconditioning. The stores are currently capable of reconditioning on average
between 500 and 1,000 cars per month. In addition to the extra capacity expected
to be provided by new reconditioning centers, CarMax believes it can create
additional capacity, if needed, at its existing facilities by installing more
service bays, employing more technicians and increasing hours of operation.
SERVICE AND PARTS
CarMax service departments currently perform minor repair services at all
store locations under the CarMax free, 30-day comprehensive warranty on used
vehicles and more extensive warranty service on Chrysler vehicles at the CarMax
new-car franchise in Atlanta, Georgia. CarMax plans to expand its retail repair
service operations, including service performed under CarMax service policies,
and is currently operating prototypes for such expanded service at its Atlanta,
Georgia retail locations. CarMax is developing systems and procedures that are
intended to ensure that the CarMax retail repair service operations are
conducted in the same customer-friendly and efficient manner as the other CarMax
operations. Commencing in fiscal 1998, CarMax intends to offer the expanded
retail repair service to the public at all existing and future store locations.
Expansion of retail repair service will be facilitated by the planned rollout of
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions, freeing up space at the retail stores
for the additional retail repair work. See " -- Growth Strategies -- Rapid
Rollout of Used-Vehicle Stores" and " -- CarMax Used-Vehicle
Operations -- Reconditioning."
CarMax believes that the efficiency of its service operations are enhanced
by its use of lateral support groups in servicing and reconditioning vehicles as
well as by its compensation programs which are designed to increase the
productivity of its service technicians and result in reduced costs and
higher-quality repairs and reconditioning. Each group contains a small number of
service professionals with different skills and levels of experience. The
experienced technicians in the group perform the more complicated repairs with
assistance from the apprentices, who also perform simpler functions on their
own. Rather than paying technicians on an hourly basis, each technician receives
a flat rate for each repair or service performed. CarMax is able to track the
productivity of each technician through AutoMation.
CarMax places special emphasis on attracting, developing and retaining
qualified technicians and believes that its favorable working conditions and
compensation programs allow it to attract and retain highly qualified
technicians in each market it enters. All technicians attend in-house training
programs designed to develop their skills in performing routine repair services
on the diverse makes and models of vehicles sold by CarMax. Technicians at the
CarMax new-car franchise in Atlanta, Georgia also attend manufacturer-sponsored
training programs to stay abreast of current diagnostic, repair and maintenance
techniques for Chrysler-manufactured vehicles. In addition, utilization of
lateral support groups allows for greater on-the-job training opportunities for
new technicians.
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The CarMax parts departments currently support both the reconditioning and
warranty service functions of the business. Upon completion of the current test
for expanded retail services, CarMax may consider the promotion of retail sales
of accessories in those expanded operations.
CARMAX NEW-VEHICLE OPERATIONS
CarMax believes that the sources of consumer dissatisfaction associated
with the traditional used-vehicle buying process are similar to those
experienced in new-vehicle purchasing. As a result, CarMax believes that its
approach to used-vehicle sales can be successfully applied to new-vehicle
retailing.
CarMax currently operates a Chrysler franchise at one of its Atlanta,
Georgia locations where it employs the same efficient customer-friendly sales
process as in its used-vehicle operations. It offers new cars with a full range
of related services, at low, "no-haggle" prices and uses AutoMation to provide
complete information to the customer regarding vehicle inventory, as well as
financing and service policy options. Unlike many traditional new-car dealers,
it does not charge processing, administration, application or other "hidden"
fees and does not attempt to sell other options at inflated prices.
CarMax was able to add the Chrysler franchise to one of its existing
used-car operations by expanding the available display space, hiring additional
sales consultants and producing advertising relating specifically to its new
vehicles. The new-vehicle operation has been successful to date, surpassing in
less than five months of operation the annual planning volume established by
Chrysler and permitting CarMax to achieve additional leverage on its store
overhead and other costs. Based upon its experience to date with the Atlanta
location, CarMax believes the addition of a new-vehicle franchise to a used-
vehicle store should provide incremental revenues and contribute to the store's
operating profits (including profits from vehicle financing but before the
allocation of Group overhead expense) during the first full year of franchise
operation. CarMax intends to aggressively pursue new car franchises for its new
and existing stores both through acquisition of franchises within the territory
of its store operations and through new grants. CarMax plans to add more than 25
new car franchises to its used-car operations over the initial phase of its
rollout through fiscal 2002. However, given the relative unavailability of new
franchises and the limited availability of franchises within a suitable radius
of its existing and proposed stores, as well as the uncertain future willingness
of manufacturers to approve these transactions, CarMax cannot assure that it
will be able to achieve this portion of its growth plan. CarMax has received
initial indications from several foreign and domestic manufacturers of their
willingness to approve CarMax as a franchisee. CarMax is continuing to explore
opportunities with these manufacturers, as well as with existing franchised
dealerships.
VEHICLE FINANCING
CarMax provides financing for its customers' vehicle purchases through its
financing unit, FNAC, and also arranges financing through NationsBank, N.A.
("NationsBank") and other third-party lenders. After a customer has selected a
vehicle to purchase, a financing application is submitted electronically through
AutoMation to both FNAC and NationsBank, where computerized systems evaluate the
creditworthiness of the customer. Based upon multiple credit bureau checks,
information provided by the customer and credit standards prescribed by the
lender, CarMax presents qualified customers with financing offers from either
FNAC or NationsBank, or both, typically within less than eight minutes. If the
customer fails to meet the automated standards for expedited credit approval,
the lenders' credit personnel undertake further analysis, following which an
adjustment to the terms of the proposed credit may be made or, in cases of more
serious credit problems, the application may be forwarded to one or more
third-party lenders specializing in sub-prime credit loans. All financings are
typically installment contracts secured by the vehicles financed and generally
require a down payment. Customers are permitted to refinance their loans within
three days of a purchase without incurring any finance or related charges.
FNAC generates income from the financing it provides to CarMax customers
primarily through the sale and servicing of the contract receivables it
originates. In addition, FNAC enables CarMax to make credit decisions based on
overall business considerations and thus helps to ensure the reasonable
availability of credit to support CarMax vehicle sales (while retaining its
prudent credit standards) in the event third-party lenders should curtail credit
availability due to market considerations. CarMax believes that the high quality
of its used vehicles as well as the broad scope of the service polices it sells
reduce default rates on its customers' loans by helping to keep the purchased
vehicles operational. The lower default rates enable CarMax to provide and
arrange financing at competitive rates. CarMax provides financing for
approximately 70 percent of its customers through its prime lenders, with about
half of these prime loans placed by FNAC. Another five to 10 percent of CarMax
used-vehicle financing is provided by third-party sub-prime lenders. The CarMax
arrangements with NationsBank and other third-party lenders provide for payment
of a fee to CarMax at the time of financing provided the loan is not refinanced
within three days. CarMax has no recourse liability on loans arranged with
third-party lenders.
35
<PAGE>
FNAC currently sells contract receivables to Enterprise Funding Corporation
("EFC"), a corporation unaffiliated with the Company, which purchases interests
in contract receivables and similar assets originated by third parties. EFC
finances its purchase of such interests, including its purchase of an undivided
interest in the contract receivables originated by FNAC, primarily through the
issuance of commercial paper. CarMax retains a subordinated undivided interest
in FNAC's receivables to the extent of the excess of the receivables balance
over EFC's investment in the receivables and continues to service the
receivables for a monthly servicing fee. CarMax has no additional liability on
the receivables sold to EFC. CarMax currently expects that the total capacity of
its arrangement with EFC will increase as its business and financing needs grow.
As an alternative to loan financing, CarMax also arranges lease financing
for its new-vehicle customers through Chrysler and NationsBank. CarMax's
arrangements with Chrysler and NationsBank provide for payment of a fee to
CarMax at the time of financing. CarMax plans to offer lease financing for its
used vehicles on a selected basis beginning in fiscal 1998.
CarMax recognizes income from the sale of its contract receivables to EFC
at the time of sale. Participation fees from third-party lenders and lessors are
recognized for financial reporting purposes at the time of sale.
SERVICE POLICY SALES
At the time of a vehicle sale, CarMax offers to sell to the customer either
a primary service policy or, in the case of a new or used vehicle still covered
by the manufacturer's warranty, an extended service policy to supplement the
warranty provided by the manufacturer. The service policies are offered at a
low, fixed price. All service policies sold by CarMax have been custom-designed
to its own specifications and are administered by Virginia Surety Company, Inc.,
a subsidiary of AON Corporation, under a private-label arrangement under which
CarMax receives a fee from the administrator at the time the service policy is
sold. CarMax offers comprehensive bumper-to-bumper service policies called
"MaxCare" on its CarMax vehicles and comprehensive power train service policies
on its ValuMax vehicles.
Repair services under the policies sold by CarMax are currently provided
primarily through a network of preferred dealers, although customers are
permitted to obtain covered services from any source. CarMax believes that the
quality of the services provided by its preferred dealer network, as well as the
broad scope of its service policies, helps promote customer satisfaction and
loyalty and thus increases the likelihood of repeat and referral business. As
part of its planned expansion into retail repair service, CarMax expects that in
fiscal 1998 it will begin performing some of the repair service under those
policies at its own stores. See "Growth Strategies -- Expansion of Retail Repair
Service Operations" and "Service and Parts." CarMax already performs minor
repair work at all store locations under its free, 30-day comprehensive warranty
and more extensive warranty service on Chrysler vehicles at its new car
dealership in Atlanta.
In most states, CarMax retains no liability on the service policies it
sells and thus recognizes all of the income from fees paid by the third-party
administrator at the time of sale. In states where third-party service policy
sales are not permitted by law, CarMax sells its own service policies with
revenue deferred and recognized over the life of the contract based on industry
experience.
AUTOMATED SYSTEMS
CarMax believes that the application of computer-based management
technology to retailing promotes efficiency and profitability and enables the
Group to provide better service to its customers. With a full-time staff of more
than 90 MIS professionals, CarMax has made a commitment to improving its
existing technology and extending the use of technology to all areas of its
business -- used vehicles, new vehicles, and retail repair service, as well as
financial management and accounting systems. Access to Circuit City's technology
resources and experience has been and continue to be important to CarMax. The
first CarMax employee was an MIS associate from Circuit City who led the
AutoMation development effort. Information systems at CarMax are currently
managed by CarMax's new Chief Information Officer and three individuals at the
director level who had an average of seven years' experience with Circuit City
before transferring to CarMax. CarMax supplements these resources with strategic
guidance from Circuit City's Chief Information Officer and key members of the
Company's management information systems team, as well as outside consultants.
CarMax has leveraged Circuit City's experience in automating over 400
retail sites nationwide to develop and implement AutoMation, a proprietary
inventory and point-of-sale system that links the CarMax headquarters with all
of its facilities and provides near real-time data collection and communication
among all parts of its business. AutoMation makes it possible for CarMax
management to collect and analyze information from each store and reconditioning
center to control inventory, analyze sales, refine sales strategies, evaluate
performance and help determine compensation of sales consultants,
36
<PAGE>
technicians, buyers and managers and, ultimately, measure profitability.
AutoMation is also a key component at each step of the CarMax sales process,
providing information to customers about available inventory, financing, service
policies and fees and options, including pricing and terms.
CarMax anticipates that efficiencies generated by its substantial
investment in people, systems and hardware should position it as a low-cost
operator in its industry. CarMax believes that its commitment to the application
of computer-based management technology to retailing represents an important
competitive advantage and plans to make significant increases to its MIS staff.
MARKETING AND ADVERTISING
CarMax marketing strategies are focused on developing general awareness of
the advantages of shopping at CarMax, attracting customers who are already in
the market to purchase a vehicle and targeting specific segments of the market
through special promotions. CarMax marketing strategies are implemented
primarily through newspaper, television and radio advertising. CarMax is able to
realize significant cost savings on advertising by purchasing its advertising
jointly with the Circuit City Group, thus leveraging Circuit City's tremendous
media buying power. In fiscal 1995, the Circuit City Group was one of the
largest purchasers of newspaper advertising and spot television advertising in
the United States. As additional stores are opened in a particular market,
CarMax expects to realize further cost economies as a result of even greater
leveraging of its advertising expenses in the local market area over a larger
number of stores. CarMax utilizes market awareness and customer satisfaction
surveys to help tailor its marketing efforts to the purchasing habits and
preferences of customers in each market area.
Newspaper advertisements are designed to attract persons who have already
decided to purchase a vehicle by showing the variety, depth and low prices of
the CarMax selection in the type of vehicle desired. Such advertisements
typically involve multi-page spreads and are published three times a week. The
innovative approach of CarMax to newspaper advertising includes listing the
price of each vehicle available for sale, thereby facilitating comparison price
shopping by the consumer. CarMax television and radio advertisements are
designed to increase public awareness of the advantages of shopping at CarMax,
including the low, "no-haggle" prices, the broad selection of new and/or quality
used vehicles in a wide range of prices and the customer-friendly service.
CarMax is the sole national auto retailing sponsor of CarTalk(Register mark), a
national radio talk show designed to assist callers with their car repair
problems. CarTalk(Register mark) is currently aired on 372 stations nationwide
on National Public Radio. CarMax also targets specific segments of the
used-vehicle market through special promotions. Such promotions may focus on a
particular type of vehicle (e.g., "Minivan Month") or a particular price point
(e.g., $9,999 or less) for a large number of vehicles. Promotions are closely
coordinated by CarMax marketing staff with the purchasing departments at the
selected locations to ensure that appropriate quantities of the targeted
inventory are purchased and displayed, thus maximizing the benefits of the
promotion.
FACILITIES
CarMax currently operates six stores in Virginia, North Carolina, Georgia
and Florida. All CarMax stores are located in high-visibility, high-traffic
commercial areas. CarMax utilizes three original store prototypes that vary in
display capacity from 400 to 1,200 vehicles depending on local market size,
consumer demand and other factors. The "C" prototype is designed to serve the
most populous trade areas and offers the largest merchandise assortment, with
approximately 82,000 square feet of building space and a display capacity of up
to 1,200 vehicles. The "B" prototype is designed for medium-sized markets, with
approximately 66,000 square feet of building space and a display capacity of up
to 800 vehicles. The "A" prototype is designed to serve primarily smaller
markets and trade areas that are on the fringes of larger metropolitan markets,
with approximately 53,000 square feet of building space and a display capacity
of up to 600 vehicles.
In April 1996, CarMax opened a specialized center in Orlando, Florida
dedicated solely to reconditioning vehicles for sale at stores in the Georgia,
Florida and North Carolina markets. The reconditioning center has approximately
40 service bays and can recondition up to 2,000 cars per month.
37
<PAGE>
The following table summarizes CarMax facilities as of November 30, 1996:
<TABLE>
<CAPTION>
BUILDING SQUARE FOOTAGE
--------------------------------------
DISPLAY CAPACITY SELLING AND
(UNITS) SERVICE AREA OTHER AREA TOTAL
---------------- ------------ ----------- -------
<S> <C>
Atlanta, Georgia (Town Center)........................................ 613 14,758 21,906 36,664
Atlanta, Georgia (Gwinnett)........................................... 1,187 40,451 46,347 86,798
Charlotte, North Carolina............................................. 777 28,920 27,131 56,051
Orlando, Florida...................................................... 684 31,265 27,996 59,261
Raleigh, North Carolina............................................... 600 19,419 20,589 40,008
Richmond, Virginia.................................................... 509 18,299 14,279 32,578
Tampa, Florida (1).................................................... 774 41,498 35,676 77,174
Orlando, Florida Reconditioning Facility.............................. -- 37,000 5,280 42,280
</TABLE>
- ---------------
(1) Under construction and scheduled to open by the end of fiscal 1997.
CarMax currently leases its headquarters, which is located in suburban
Richmond, Virginia, near both the main offices of the Circuit City Group and the
site of the first CarMax retail store.
FRANCHISE AGREEMENT WITH CHRYSLER
CarMax operates a new-car franchise at one of its Atlanta, Georgia stores
under a franchise agreement (the "Franchise Agreement") between Chrysler and the
CarMax Group. The Franchise Agreement provides, among other things, that CarMax
has the right and obligation to sell specified models of new
Chrysler-manufactured vehicles and provide related parts and service solely at
the Atlanta, Georgia location, and that CarMax will not sell or service at that
location any new vehicles not manufactured by Chrysler. The Franchise Agreement
expressly permits CarMax to sell and service used vehicles at this location,
regardless of the manufacturer. The Franchise Agreement also grants CarMax the
non-exclusive right to use and display Chrysler's trademarks, service marks and
designs in the form and manner approved by Chrysler. As is typically the case,
the Franchise Agreement does not guarantee exclusivity within a specified
territory. The Franchise Agreement also imposes requirements on CarMax
concerning such matters as the facilities and equipment for servicing vehicles,
the maintenance of vehicles and parts, and the training of personnel. Compliance
with these requirements is closely monitored by Chrysler. The Franchise
Agreement does not have a specified expiration date, but may be terminated by
CarMax on not less than 30 days written notice for any reason and by Chrysler on
generally not less than 60 days written notice for specified reasons, including
a breach by CarMax of any of its obligations thereunder or if, without
Chrysler's prior approval, the Company ceases to control the subsidiary that
entered into the agreement.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. For example, under the laws of Georgia, a
manufacturer may not terminate a franchise without good cause and may not
arbitrarily withhold approval for a proposed change in ownership unless it
offers to purchase the franchise from the dealer.
COMPETITION
The automotive retailing industry is highly competitive. Consumers
typically have many choices in deciding where to purchase a used or new vehicle,
particularly in the larger markets that CarMax intends to target as part of its
expansion plan. In both the used- and new-vehicle markets, CarMax seeks to
distinguish itself from traditional dealerships through its sales approach and
other innovative operating strategies.
In the used-vehicle market, CarMax competes with franchised dealers,
independent used-car dealers, automobile rental agencies and private parties.
CarMax anticipates that it will also face competition from other used-car stores
that currently employ or may adopt non-traditional selling methods similar to
those used by CarMax. CarMax believes that the principal competitive factors in
used-vehicle sales are the following: price; the ability to offer a wide
selection of vehicles, including the more popular makes and models; the quality
of the vehicles; the location of retail sites; and the degree of customer
satisfaction with the car-buying experience. Other competitive factors include
the ability to offer or arrange customer financing on competitive terms and the
quality and cost of primary and extended warranties. CarMax believes that its
stores are competitive in all of these areas and enjoy certain advantages over
its competitors that employ traditional selling methods. See " -- Operating
Strategies -- Efficient, Customer-Friendly Sales Process."
38
<PAGE>
In the new-vehicle market, CarMax competes with other franchised dealers
offering vehicles produced by the same or other manufacturers, auto brokers and
leasing companies. CarMax believes that the principal competitive factors in
new-vehicle sales are the following: price; dealer sales promotions; the ability
of dealerships to offer a wide selection of the most popular vehicles; the
location of retail sites; and the quality of customer service. CarMax believes
its new-vehicle store in Atlanta, Georgia is competitive in all of these areas;
however, because the franchise was awarded in 1995 and because of the inventory
allocation system utilized by Chrysler under which future allocations are based
on prior sales, the store has not yet reached the inventory levels that CarMax
expects to be available at maturity. Given that the new-vehicle market has
historically been served primarily by dealerships employing traditional
marketing techniques, CarMax believes that its use of innovative selling methods
will create additional competitive factors in which CarMax may have an
advantage. See " -- Operating Strategies -- Efficient, Customer-Friendly Sales
Process."
When arranging or providing financing for its customers' vehicle purchases,
CarMax, through FNAC, competes with a broad range of financial institutions.
CarMax believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms. CarMax believes that it is
competitive in all of these areas.
In addition to being affected by national competitive trends, the success
of CarMax depends, in part, on regional auto buying trends, local and regional
economic factors and other regional competitive pressures. Currently, CarMax
sells its vehicles in Virginia, North Carolina, Florida and Georgia. Conditions
and competitive pressures, such as aggressive discounting by manufacturers or a
general economic downturn in the region, affecting these markets or new markets
that CarMax enters could adversely affect CarMax, although the automotive retail
industry as a whole might not be affected.
SERVICE MARKS
The marks "CarMax," "CarMax The Auto Superstore," "The New Way to Buy Used
Cars," "MaxCare," "ValuMax" and "AutoMation" are federally registered service
marks of CarMax, and CarMax considers these marks and the accompanying goodwill
and customer recognition to be valuable to its business. CarMax has applied for
or received federal registrations for numerous other service marks routinely
used in its business, including variations of, and designs associated with,
those named above. Such registrations can be kept in force in perpetuity through
continued use of the marks and timely applications for renewal. For a
description of certain legal proceedings related to the CarMax mark, see
" -- Legal Proceedings and Insurance."
GOVERNMENTAL REGULATION
The CarMax operations are subject to ongoing regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. Among other things, these laws require that CarMax obtain a license
in order to establish, operate or relocate a dealership or to operate an
automotive repair facility. These laws also regulate the manner in which CarMax
conducts its business, including its advertising and sales practices.
The financing activities of CarMax with its customers are subject to
federal truth in lending, consumer lending and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws. Some states regulate
finance fees that may be paid as a result of vehicle sales.
As with automobile dealerships generally, and service operations in
particular, the CarMax business involves the use, handling and disposal of
hazardous or toxic substances, including motor oil, gasoline, transmission
fluid, solvents, lubricants and other materials. The business also involves the
past and current operation and/or removal of aboveground and underground storage
tanks containing such substances. Accordingly, CarMax is subject to federal,
state and local laws and regulations governing air and water quality and the
handling, storage and disposal of hazardous or toxic substances. CarMax believes
that it does not have any material environmental liabilities and that compliance
with such laws and regulations will not, individually or in the aggregate, have
a material adverse effect on its results of operations or financial condition.
However, environmental laws and regulations are complex and subject to frequent
change. There can be no assurance that compliance with amended, new or more
stringent laws or regulations, stricter interpretations of existing laws or the
future discovery of environmental conditions at current or future locations will
not require additional expenditures by CarMax, or that such expenditures would
not be material.
CarMax believes that it is in substantial compliance with all laws
affecting its business. Possible penalties for violation of any of these laws
include revocation of licenses and imposition of fines. In addition, many laws
may give customers a private cause of action.
39
<PAGE>
EMPLOYEES
On November 30, 1996, CarMax had 1,368 employees, of whom 146 were employed
in store managerial positions, 351 were employed on a commission basis in
non-managerial store sales positions, 595 were employed in non-managerial
purchasing, parts and service positions and the balance were employed in other
administrative and managerial positions. Management of CarMax considers its
relationship with its employees to be good. None of the CarMax employees is
subject to a collective bargaining agreement.
LEGAL PROCEEDINGS AND INSURANCE
By letter dated April 26, 1996, OfficeMax, Inc. accused the Company of
infringing OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The
Company denies such allegations and on May 19, 1996, filed suit in the U.S.
District Court for the Eastern District of Virginia seeking a declaratory
judgment that the Company's use and registration of the mark CARMAX and other
marks containing MAX as a prefix or suffix do not violate any rights of
OfficeMax, Inc. On June 10, 1996, OfficeMax, Inc. filed a counterclaim against
the Company seeking unspecified damages and an order enjoining the Company from
using certain marks, including the mark CARMAX. On October 22, 1996, the Court
granted the Company's motion to file an amended complaint requesting, among
other things, that certain of OfficeMax, Inc.'s marks be cancelled or declared
void. On November 1, 1996, OfficeMax, Inc. filed an amended complaint
requesting, among other things, that certain of the Company's marks be cancelled
or declared void. The Court has severed the parties' amended claims from the
original declaratory judgment suit. A trial on the declaratory judgment suit has
been set for February 12, 1997. Although it is impossible to predict the outcome
of this litigation, the Company believes that it has a valid basis for its
complaint and that OfficeMax, Inc.'s allegations and counterclaims are without
merit.
In addition to the matters described above, CarMax is involved in various
legal proceedings that arise in the normal course of business. Based upon its
evaluation of the information currently available, CarMax believes that the
ultimate resolution of such proceedings will not have a material adverse effect
on the financial position, liquidity or results of operations of CarMax.
CarMax maintains general liability and property insurance and an umbrella
and excess liability policy in amounts it considers adequate and customary for
businesses of its kind. However, there can be no assurance that CarMax will not
experience legal claims in excess of its insurance coverage or claims which are
ultimately not covered by insurance.
40
<PAGE>
MANAGEMENT OF THE CARMAX GROUP
The following table sets forth certain information concerning the
management of the CarMax Group:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- -------------------------------------------------------------------------------------
<S> <C>
Richard L. Sharp 49 Chairman of the Board, President and Chief Executive Officer of the Company.
Michael T. Chalifoux 49 Senior Vice President, Chief Financial Officer and Secretary of the Company.
W. Austin Ligon 46 President of CarMax and Senior Vice President -- Automotive for the Company.
Mark F. O'Neil 38 Vice President and General Manager of CarMax.
Keith D. Browning 44 Vice President and Chief Financial Officer for CarMax and Vice President of the Company.
Thomas J. Folliard 31 Vice President of Merchandising for CarMax.
Michael K. Dolan 47 Vice President and Chief Information Officer for CarMax.
Fred S. Wilson 47 Assistant Vice President, Loss Prevention for CarMax.
</TABLE>
Mr. Sharp joined the Company as an Executive Vice President in 1982. He
became President of the Company in 1984, Chief Executive Officer in 1986 and
Chairman of the Board in 1994. He is a director of James River Corporation of
Virginia and Flextronics International, Ltd. He has been a director of the
Company since 1983.
Mr. Chalifoux joined the Company in 1983 as Corporate Controller and was
elected Vice President and Chief Financial Officer in 1988. He became Senior
Vice President and Chief Financial Officer in 1990 and Secretary in 1993. He has
been a director of the Company since 1991. He was instrumental in establishing
and expanding both Circuit City's and CarMax's credit operations.
Mr. Ligon joined the Company in 1990 as Vice President of Corporate
Planning and was named Senior Vice President in 1991. Mr. Ligon came to Circuit
City from Marriott Corporation where he was Senior Vice President of Strategic
Planning for Marriott Hotels and Resorts. He joined Marriott in 1984 as Director
of Corporate Planning and Business Development. He also served as Vice President
of Marketing in Marriott's family restaurant division and as Vice President and
General Manager of the Allie's Restaurant Division.
Mr. O'Neil joined the Company in 1992 as Director of Special Projects for
the new automotive division and was promoted to Vice President and General
Manager in 1995. Mr. O'Neil had prior automotive experience with Ertley
Motorworld, a dealer with 19 franchises based in Wilkes-Barre, Pennsylvania,
where he was President and Chief Operating Officer from 1990 to 1992. Mr. O'Neil
had additional automotive experience with BTE/Collision Repair Experts, Inc. in
Philadelphia, Pennsylvania, where he was a General Manager/Partner from 1988 to
1990 and GKN Autobody in Memphis, Tennessee, where he was Director of
Development and Marketing from 1987 to 1988.
Mr. Browning joined the Company in 1982 as Assistant Controller for the
West Coast Division of Circuit City and was the Controller for the division from
1984 to 1987. In 1987 Mr. Browning was appointed Assistant Controller for the
Company and was promoted to Corporate Controller in 1990. Mr. Browning was
promoted to Vice President of the Company in 1995 and joined CarMax in early
1996. Mr. Browning has had extensive experience with the rollout of other
Circuit City business concepts, beginning with the initial Circuit City
Superstore rollout for the West Coast Division. Mr. Browning has been involved
in the development of accounting procedures, systems and internal controls for
CarMax since its inception.
Mr. Folliard joined the CarMax Group in 1993 as the Senior Buyer and became
the Director of Purchasing in 1994. Mr. Folliard was promoted to Vice President
of Merchandising of the CarMax Group in 1996. He is responsible for the
purchasing functions of the Group and has been instrumental in the design and
development of the buyer training program and in-store wholesale auction
process. Mr. Folliard's prior experience was with Jim Rathman Chevrolet/Cadillac
in Melbourne, Florida in auto wholesaling from 1989 to 1993 where he was a
member of one of the largest wholesale-buying groups in the southeastern U.S..
Mr. Dolan joined the CarMax Group in 1997 as Vice President and Chief
Information Officer. Mr. Dolan had prior management information systems
experience with H.E.B. Stores, a privately held company that is a fast-growing
grocery retailer, where he was vice president and chief information officer.
Prior to joining H.E.B. Stores in 1985, Mr. Dolan had management information
systems experience with Vons Companies, Blue Cross of Southern California,
California Federal Bank and Carnation, Inc.
Mr. Wilson joined the Company in 1990 as Director of Loss Prevention and
was promoted to Assistant Vice President, Loss Prevention in 1993. Mr. Wilson
has several years "big-ticket" retail experience as well as several years of
high-volume retail experience. Mr. Wilson joined CarMax in August of 1996.
41
<PAGE>
CARMAX GROUP SELECTED HISTORICAL FINANCIAL DATA
The selected financial data presented below as of November 30, 1996, and
for the nine months ended November 30, 1996 and 1995 were derived from the
CarMax Group's unaudited interim Financial Statements set forth herein, which
include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Interim operating results are not necessarily indicative of the results that may
be expected for a full year. The selected financial data presented below as of
February 29, 1996, and for each of the years in the three-year period ended
February 29, 1996, were derived from the CarMax Group's Financial Statements set
forth herein, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected financial data should be read in conjunction with the
CarMax Group's Financial Statements, the CarMax Group's unaudited interim
Financial Statements, and the information in "CarMax Group Management's
Discussion and Analysis of Results of Operations and Financial Condition" set
forth herein, as well as the Company's Consolidated Financial Statements, the
Company's unaudited interim Consolidated Financial Statements, and the
information in "Company Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $375 $203 $276 $ 77 $ 16
Cost of sales......................................... 344 186 252 72 14
---- ---- ---- ---- ----
Gross profit....................................... 31 17 24 5 2
---- ---- ---- ---- ----
Selling, general and administrative expenses.......... 35 21 29 11 5
Interest expense...................................... 4 3 4 1 --
---- ---- ---- ---- ----
Total expenses........................................ 39 24 33 12 5
---- ---- ---- ---- ----
Loss before income tax benefit..................... 8 7 9 7 3
Income tax benefit.................................... 3 3 4 3 1
---- ---- ---- ---- ----
Net loss........................................... $ 5 $ 4 $ 5 $ 4 $ 2
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
AS AS
OF OF
NOVEMBER FEBRUARY
30, 1996 29, 1996
---- ----
<S> <C>
BALANCE SHEET DATA
Working capital....................................... $(18) $ 47
Total assets.......................................... 184 103
Total debt............................................ 172 97
Accumulated group deficit............................. 16 11
</TABLE>
42
<PAGE>
CARMAX GROUP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The CarMax Group began operations with one store in Richmond, Virginia, in
October of the fiscal year ended February 28, 1994. As of November 30, 1996, the
Group operated six retail locations. Three different store formats, which vary
in acreage, vehicle assortment and facility square footage allow the Group to
tailor its operations to the populations and volume expectations for specific
trade areas. The "C" store in operation today covers 30 acres with room to
display up to 1,200 vehicles and includes an 86,000 square foot showroom,
reconditioning and service facility. The two "B" format stores average 20 acres,
have room to display up to 700 vehicles and include facilities that average
58,000 square feet. The three "A" format stores average 12 acres, have room for
up to 600 vehicles and include facilities that average 36,000 square feet.
Early in the current fiscal year at the Group's used car "C" store location
in Atlanta, Georgia, CarMax began selling new Chrysler, Plymouth, Jeep and Eagle
vehicles under the terms of a franchise agreement with Chrysler Corporation.
The table below details CarMax retail units:
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28 OR 29
--------------- ----------------------------
1996 1995 1996 1995 1994
---- ------ ------ ------ ------
<S> <C>
"C" Store...................................................... 1 1 1 -- --
"B" Store...................................................... 2 -- -- -- --
"A" Store...................................................... 3 3 3 2 1
-
------ ------ ------ ------
Total.......................................................... 6 4 4 2 1
-
-
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
In order to present historical financial information which represents the
business defined as the CarMax Group, certain reclassifications have been made
to conform the results of operations for all periods presented. The accounts of
the Company's test in wholesaling used cars, which has ceased operation, were
excluded from the CarMax Group's results of operations. As a result, both net
sales and net losses are lower than previously reported amounts.
SALES GROWTH
Total sales increased 258 percent in fiscal 1996, to $275.9 million. In
fiscal 1995 total sales increased 376 percent to $77.0 million from $16.2
million in fiscal 1994. The fiscal 1996 sales growth primarily reflects the
addition of new locations and includes a 12 percent comparable stores sales
increase for one location classified as a comparable store throughout the year
and a second location classified as a comparable store for a portion of the
year. The fiscal 1995 growth includes a 43 percent comparable store sales
increase for one location classified as comparable for a portion of the year.
In most states, CarMax sells service policies on behalf of an unrelated
third-party and has no contractual liability to the customer under the service
policy program. Commission revenue from third-party service policy programs is
recognized immediately. In states where third-party service policy sales are not
permitted by law, CarMax sells its own service policies. Revenues from the
Group's service policies are deferred and recognized over the life of the
contract based on industry experience. As the Group grows, it expects that
third-party sales will constitute the larger percentage of service policy sales.
Gross dollar sales (aggregate consumer's retail purchase price) from all
service policy programs were 3.8 percent of total sales in fiscal 1996 compared
to 3.3 percent and 3.5 percent in fiscal 1995 and 1994, respectively. Total
service policy revenue, which is reported in total sales, was 1.4 percent of
total sales in fiscal 1996 compared to 0.5 percent and 0.1 percent in fiscal
1995 and 1994, respectively. Third party service policy revenues were 1.3
percent of total sales in fiscal 1996 compared to 0.4 percent in fiscal 1995.
IMPACT OF INFLATION. Management expects that increases in vehicle pricing
would have a positive impact on CarMax's sales and earnings. However, increased
interest rates, including rates associated with consumer installment credit,
could have a negative impact on sales and earnings.
GROSS PROFIT
The CarMax marketing concept includes a strong commitment to providing a
high level of consumer value. The CarMax strategy is to price vehicles at or
below the best negotiated price in the market. As a result, CarMax operates with
lower gross profit margins than industry averages for used-vehicle dealerships.
The gross profit margin was 8.6 percent in fiscal 1996, 6.3 percent in fiscal
1995 and 12.2 percent in fiscal 1994. Improved inventory management, including
optimizing each store's
43
<PAGE>
vehicle mix and display based on local market demand, contributed to the margin
increase in fiscal 1996. The fiscal 1994 margin reflects results from the
Group's first location, which operated for the last five months of the fiscal
year. Pricing adjustments made during the early stages of operation reduced the
gross margin from fiscal 1994 to fiscal 1995 but also produced higher per store
sales volumes. Cost of sales includes the cost of vehicles, reconditioning
costs, transportation and other purchasing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CarMax's consumer value marketing concept produces average store volumes
significantly higher than industry averages. As a result, selling, general and
administrative expenses are expected to be relatively lower as a percentage of
sales. Over the past three years, the expense to sales ratio has declined as
sales from additional locations and comparable store sales growth have leveraged
expenses, including start-up costs and Group overhead expenses. Selling, general
and administrative expenses were 10.3 percent of sales in fiscal 1996, 14.0
percent in fiscal 1995 and 30.0 percent in fiscal 1994.
Operating profits generated by the CarMax Group's installment lending
division, First North American Credit, and fees received for arranging financing
through third parties are recorded as a reduction to selling, general and
administrative expenses.
INTEREST EXPENSE
Interest expense was 1.5 percent of sales in fiscal 1996, 1.4 percent in
fiscal 1995, and 1.0 percent in fiscal 1994. Interest expense is incurred on
allocated debt used primarily for store expansion and inventory and receivables
growth.
INCOME TAXES
The Group's effective income tax rate was 41.5 percent in fiscal 1996, 41.2
percent in fiscal 1995 and 40.8 percent in fiscal 1994. The CarMax Group
generated losses in all reported periods, and as a result has recorded related
income tax benefits. Compared to the Circuit City Group, this Group experienced
relatively higher state income tax rates due to the fact that as members of the
consolidated group for state tax purposes the CarMax Group is subject to income
tax in states in which it presently does not conduct business. The resulting
high tax rate is expected to decline as the Group expands geographically into
additional states.
NET LOSS
Management anticipated that CarMax would produce a loss in its initial
growth stage. The pre-tax loss totaled $8.9 million in fiscal 1996, $7.0 million
in fiscal 1995 and $3.0 million in fiscal 1994. After-tax losses totalled $5.2
million in fiscal 1996, $4.1 million in fiscal 1995 and $1.8 million in fiscal
1994. Although the Group has produced losses as expected, all stores open as of
August 31, 1996, are currently producing an operating profit including profits
from vehicle financing but before the allocation of Group overhead expenses.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Accumulated Group deficits at February 29, 1996, and November 30, 1996,
totalled $11.2 million and $15.7 million, respectively. The Group has funded
such deficits and the expansion of the store base and installment loan portfolio
through a combination of allocated external debt, sale leaseback transactions
and receivables securitizations. The Group continues to work towards obtaining a
cost effective securitization of automobile inventory.
In fiscal 1996, net cash provided by operating activities was $16.1 million
compared with $68.0 million used in operating activities in fiscal 1995 and
$20.0 million used in operating activities in fiscal 1994. The fiscal 1996 cash
increase principally reflects a decrease in net accounts receivable due to the
sale of installment loan receivables through securitizations, as described
below, and a more limited growth of inventory in relation to sales growth. The
increase in cash used in operating activities in fiscal 1995 reflects an
increase in installment loan receivables generated by existing and new stores
and an increase in inventory to support new store openings.
Net cash used in operating activities was $14.1 million for the nine months
ended November 30, 1996, reflecting a use of cash to fund an additional $9.6
million in accounts receivable and $9.3 million in inventory, prepaid expenses
and other current assets, which was partially offset by a $8.0 million increase
in accounts payable, accrued expenses and other current liabilities.
44
<PAGE>
For the nine months ended November 30, 1995, the $32.4 million cash
provided by operating activities was largely the result of a $27.4 million
decrease in accounts receivable from an initial securitization transaction and a
$5.3 million decrease in inventory, prepaid expenses and other current assets.
The auto loan securitization program was started in fiscal 1996 with
securitized receivables totalling $87.0 million at February 29, 1996. At
November 30, 1996, securitized receivables totalled $135.0 million. Under the
securitization program, receivables are sold to an unaffiliated third party with
the servicing benefit retained. The Group expects that the existing
securitization programs can be increased to accommodate receivables growth as
CarMax grows.
The CarMax Group's capital expenditures were $26.8 million in fiscal 1996,
$33.0 million in fiscal 1995 and $7.3 million in fiscal 1994. The Group
anticipates capital expenditures for fiscal 1997 to aggregate approximately $185
million. Capital expenditures for the first nine months of fiscal 1997 were
$60.5 million. Most of CarMax's capital expenditures through the third quarter
of fiscal 1997 related to the opening of its six existing stores, its
reconditioning center and stores scheduled to open over the following 12 months.
Capital expenditures for the balance of fiscal 1997 will consist primarily of
expenditures for the remaining fiscal 1997 store opening and store openings in
fiscal 1998.
The Group relies on the Company's allocated external debt to fund operating
deficits and to provide working capital needed to fund net assets not otherwise
disposed of through sale-leasebacks or receivable securitizations. All
significant financial activities of the Group are managed by the Company on a
centralized basis and are dependent on the financial condition of the Company.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
The Company anticipates that the proceeds of the CarMax Stock Proposal,
proceeds from the sales of property and equipment and receivables, and increases
in the Company's debt allocated to the CarMax Group, together with cash
generated by operations, will be sufficient to fund CarMax Group's capital
expenditures and operations through the expansion period.
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF FISCAL 1997 VERSUS FIRST NINE
MONTHS OF FISCAL 1996
SALES GROWTH
Total sales rose 57 percent for the quarter ended November 30, 1996, to
$118.4 million from $75.5 million in last year's third quarter. Comparable store
sales increased 22 percent for the third quarter of fiscal 1997. Total sales
increased 85 percent to $375.3 million in the first nine months of fiscal 1997
compared to $203.1 million in the first nine months of fiscal 1996. Comparable
store sales increased 21 percent for the first nine months of fiscal 1997. The
sales growth primarily reflects the addition of new stores, and the addition of
the Chrysler new-car franchise at one of the Atlanta, Georgia, stores.
Gross dollar sales from all service policies were 3.5 percent of total
sales in the first nine months of fiscal 1997 compared with 3.8 percent in the
first nine months of fiscal 1996. The decline in service policy revenues
reflects the addition of the Chrysler franchise, where manufacturer's warranty
coverage results in lower penetration. Total service policy revenues, which are
reported in total sales, were 1.2 percent of total sales in the first nine
months of fiscal 1997 compared to 1.4 percent in the first nine months of fiscal
1996. Third-party service policy revenues were 1.1 percent of total sales in the
first nine months of fiscal 1997 compared to 1.3 percent in the first nine
months of fiscal 1996.
SEASONALITY
CarMax Group sales are subject to seasonal influences. Generally the Group
experiences more of its net sales in the first half of the fiscal year.
Therefore, interim results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
GROSS PROFIT
The gross profit margin decreased to 7.0 percent of sales in the third
quarter of fiscal 1997 from 7.6 percent for the same period of fiscal 1996.
Gross profit as a percentage of sales was 8.4 percent in the first nine months
of fiscal 1997 compared to 8.5 percent for the first nine months of fiscal 1996.
The decrease in the gross profit margin reflected the addition to the sales mix
of new-car sales generated by the Chrysler franchise. Due to the seasonal nature
of the business, gross margins are typically lower in the third quarter.
45
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Additional overhead to support the first phase in the Group's national roll
out increased the expense ratio for the third quarter to 11.0 percent of sales
this year from 10.3 percent in the same period last year. However, the expense
ratio decreased as a percentage of sales to 9.3 percent of sales in the first
nine months of fiscal 1997 compared to 10.3 percent of sales in the first nine
months of fiscal 1996. This decrease was primarily attributable to an increase
in FNAC's servicing revenue, comparable store sales growth and increased sales
from new stores and the addition of the Chrysler franchise.
INTEREST EXPENSE
Interest expense was 1.6 percent of sales for the third quarter of fiscal
1997 compared with 1.4 percent for the third quarter of fiscal 1996. Interest
expense was 1.1 percent of sales in the first nine months of fiscal 1997
compared to 1.5 percent of sales in the first nine months of fiscal 1996. The
decrease in interest expense as a percentage of sales for the nine-month period
reflects the securitization of the Group's installment receivables and the
improved level of inventory per store.
INCOME TAXES
The Group's effective tax rate was 41.5 percent for the third quarter of
fiscal 1997 compared with 41.9 percent for the same period last year. The
effective tax rate was 41.5 percent for the nine month periods ended November
30, 1996, and November 30, 1995.
NET LOSS
The Group's net loss for the third quarter of fiscal 1997 was $3.9 million
compared with a loss of $1.8 million for the third quarter of fiscal 1996. The
net loss for the first nine months of fiscal 1997 was $4.5 million compared with
a loss of $3.9 million for the first nine months of fiscal 1996. The higher net
losses were a result of increased costs from acceleration of Group overhead and
other infrastructure to support its accelerated roll-out plan.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and shall be
applied prospectively. The Group does not expect the standard to have a material
impact on the Group's financial position or results of operations.
OPERATIONS OUTLOOK
The CarMax Group expects to enter 45 of the nation's top 50 markets,
reaching a total store count of 80 to 90 locations by fiscal 2002. The expansion
plans include one additional store in the current fiscal year, eight to 10
stores next fiscal year and 15 to 20 openings per year thereafter. The Group
also will continue to explore opportunities in new-car retailing. In less than
five months of operation, the Chrysler franchise location surpassed the annual
planning volume established by Chrysler. As a result, the Group intends to
pursue new car franchises by acquisition of existing franchises and franchise
grants from automobile manufacturers. The Group currently provides a full range
of repair service on all new vehicles and limited service on used vehicles. The
Group plans on expanding its retail repair service offering in all of its
locations during fiscal 1998.
CarMax expects to produce a higher loss in fiscal 1997 versus fiscal 1996
due to the increased costs from acceleration of Group overhead and other
infrastructure to support its accelerated roll-out plan as well as adjustments
to existing locations to incorporate operating enhancements. The loss for the
fourth quarter of fiscal 1997 is expected to be similar to that of the third
quarter of fiscal 1997. The Group expects to generate results in fiscal 1998
similar to those in fiscal 1997 and to generate profits by fiscal year 1999.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the CarMax Group. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk Factors"
and in the Company's 1996 Annual Report on Form 10-K. See "Cautionary Statement
Regarding Forward-Looking Statements."
46
<PAGE>
CERTAIN MANAGEMENT AND ALLOCATION POLICIES
The Company will prepare financial statements in accordance with generally
accepted accounting principles, consistently applied, for both the CarMax Group
and the Circuit City Group, and these financial statements, taken together, will
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The financial statements of each of the
Groups principally reflect the financial position, results of operations and
cash flows of the businesses included therein. Consistent with the Amended
Articles and relevant policies, such Group financial statements also will
include allocated portions of the Company's corporate general and administrative
costs and other shared services. Notwithstanding such allocations for the
purpose of preparing each of the Group's financial statements, holders of CarMax
Stock and Circuit City Stock will continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. See "Risk Factors -- Shareholders of One Company; Financial
Effects on One Group Could Affect the Other."
Principal corporate activities will be allocated to the Groups based on
methods that management of the Company believes to be reasonable and will be
reflected in their respective financial statements as follows:
(i) Most financial activities will be managed by the Company on a
centralized basis. Such financial activities include the investment of
surplus cash, the issuance and repayment of short-term and long-term debt
and the issuance and repurchase of any Preferred Stock. In the event that
cash or other property allocated to one Group is transferred to the other
Group (other than transfers made with respect to the Inter-Group Interest
upon the payment of any dividend or other distribution on CarMax Stock),
such transfer will be accounted for in one of the following ways, as
determined by the Board of Directors: (A) as a reallocation of pooled debt
(as defined below) or Preferred Stock, as described in paragraph (ii)
below, (B) as a short-term or long-term loan from one Group to the other
Group, as described in paragraph (iii) below, (C) as an increase or
decrease in the Number of Shares Issuable with Respect to the Inter-Group
Interest, as described in paragraph (iv) below, or (D) as a sale of assets
between the two Groups. There are no specific criteria to determine which
of the foregoing would be applied to a particular transfer of cash or
property from one Group to the other Group. Such determination would be
made by the Board of Directors in the exercise of its business judgment
based upon all relevant circumstances, including the financing needs and
objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general
economic conditions. All transfers of material assets from one Group to the
other Group will be made on a fair value basis for the foregoing purposes,
as determined by the Board of Directors.
(ii) Debt of the Company is either allocated between the Groups
("pooled debt") or is allocated in its entirety to one Group. Preferred
Stock, if issued, will be allocated in a similar manner. Cash allocated to
one Group that is used to repay pooled debt or redeem Preferred Stock will
decrease such Group's allocated portion of the pooled debt or Preferred
Stock, respectively. Cash or other property allocated to one Group that is
transferred to the other Group will, if so determined by the Board of
Directors, decrease the transferring Group's allocated portion of the
pooled debt or Preferred Stock and, correspondingly, increase the recipient
Group's allocated portion of the pooled debt or Preferred Stock. The pooled
debt bears interest at a rate based on the weighted average interest rate
of such debt calculated on a periodic basis and applied to the average
pooled debt balance during the period. Preferred Stock, if issued and if
pooled in a manner similar to the pooled debt, will bear dividends at a
rate based on the weighted average dividend rate of such Preferred Stock
similarly calculated and applied. Any expense related to debt or Preferred
Stock of the Company that is allocated in its entirety to either Group will
be allocated in whole to such Group, and any expense related to increases
in pooled debt or Preferred Stock will be reflected in the weighted average
interest or dividend rate of such pooled debt or Preferred Stock as a
whole.
(iii) Cash or other property allocated to one Group that is
transferred to the other Group, could, if so determined by the Board of
Directors, be accounted for either as a short-term loan or as a long-term
loan. The Board of Directors would establish the terms on which loans
between the Groups would be made, including interest rate, amortization
schedule, maturity and redemption terms.
(iv) Cash or other property allocated to the Circuit City Group that
is contributed as additional equity to the CarMax Group will increase the
Number of Shares Issuable with Respect to the Inter-Group Interest and,
accordingly, will increase the Inter-Group Interest Fraction and decrease
the Outstanding CarMax Fraction. Cash or other property allocated to the
CarMax Group that is transferred to the Circuit City Group would, if so
determined by the Board of Directors, decrease the Number of Shares
Issuable with Respect to the Inter-Group Interest and, accordingly, would
decrease the Inter-Group Interest Fraction and increase the Outstanding
CarMax Fraction.
47
<PAGE>
(v) For the periods prior to the Offering, all financial impacts of
equity offerings have been reflected entirely in the financial statements
of the Circuit City Group. After the Offering, all financial impacts of
issuances of additional shares of CarMax Stock, the proceeds of which are
attributed to the CarMax Group, would be reflected entirely in the
financial statements of the CarMax Group. All financial impacts of
issuances of additional shares of Circuit City Stock or additional shares
of CarMax Stock, the proceeds of which are attributed to the Inter-Group
Interest of the Circuit City Group, would be reflected entirely in the
financial statements of the Circuit City Group. Financial impacts of
dividends or other distributions on, and purchases of, shares of CarMax
Stock or Circuit City Stock will be reflected entirely in the respective
financial statements of the CarMax Group and the Circuit City Group, except
that so long as the Circuit City Group has an Inter-Group Interest, the
Circuit City Group financial statements would be credited, and the CarMax
Group financial statements will be charged, with an amount that is
proportionate to the aggregate amount paid in respect of any such dividend
on, or other distribution with respect to, the CarMax Stock.
(vi) Corporate general and administrative costs and other shared
services are generally allocated to the Groups based upon utilization of
such services by each Group. Where determinations based on utilization
alone are impracticable, other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of the cost
attributable to each Group are used.
(vii) Federal income taxes, which are determined on a consolidated
basis, are allocated to each Group in accordance with the Company's tax
allocation policy and reflected in the financial statements for each Group.
In general, the consolidated tax provision and related tax payments or
refunds are allocated between the Groups, for Group financial statement
purposes, based principally upon the financial income, taxable income,
credits and other amounts directly related to the respective Group. Tax
benefits that cannot be used by the Group generating such attributes, but
can be utilized on a consolidated basis, are allocated to the Group that
generated such benefits. As a result, the allocated Group amounts of taxes
payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns. State income
taxes generally are computed on a separate company basis.
The items discussed above have been reflected, to the extent applicable, in
the CarMax Group financial statements and are discussed in Notes to the
financial statements of the CarMax Group.
The above policies may be modified or rescinded, or additional policies may
be adopted, in the sole discretion of the Board of Directors, without approval
of the shareholders, although the Board of Directors has no present plans to do
so. Any determination of the Board of Directors to modify or rescind such
policies, or to adopt additional policies, including any such decision that
would have disparate effects upon holders of the two series of Common Stock,
would be made by the Board of Directors in its good faith business judgment of
the Company's best interests, taking into consideration the interests of all
common shareholders. See "Risk Factors -- Factors Relating to the CarMax
Stock -- Fiduciary Duties of the Board of Directors; No Definitive Precedent
Under Virginia Law."
48
<PAGE>
COMPANY SELECTED HISTORICAL FINANCIAL DATA
The selected consolidated financial data presented below as of November 30,
1996, and for the nine months ended November 30, 1996 and 1995 were derived from
the Company's unaudited interim Consolidated Financial Statements, which include
all adjustments, consisting of normal recurring accruals, that the Company
considers necessary to present fairly such data for an interim period. Interim
operating results are not necessarily indicative of the results that may be
expected for a full year. The selected consolidated financial data presented
below as of February 29, 1996, and for each of the years in the five-year period
ended February 29, 1996, were derived from the Company's Consolidated Financial
Statements, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements, the Company's unaudited
interim Consolidated Financial Statements, and the information in the Company's
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
------------------- ----------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C>
(AMOUNTS IN MILLIONS, EXCEPT
PER SHARE DATA)
RESULTS OF OPERATIONS
Net sales and operating
revenues..................... $5,246 $4,776 $7,029 $5,583 $4,131 $3,270 $2,790
Cost of sales, buying and
warehousing.................. 4,065 3,683 5,394 4,198 3,025 2,346 1,981
------ ------ ------ ------ ------ ------ ------
Gross profit.............. 1,181 1,093 1,635 1,385 1,106 924 809
------ ------ ------ ------ ------ ------ ------
Selling, general and
administrative expenses...... 1,051 921 1,323 1,106 892 745 676
Interest expense............... 20 17 25 10 5 4 9
------ ------ ------ ------ ------ ------ ------
Total expenses................. 1,071 938 1,348 1,116 897 749 685
------ ------ ------ ------ ------ ------ ------
Earnings before income
taxes................... 110 155 287 269 209 175 124
Provision for income taxes..... 42 58 108 101 77 65 46
------ ------ ------ ------ ------ ------ ------
Net earnings.............. $ 68 $ 97 $ 179 $ 168 $ 132 $ 110 $ 78
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Weighted average shares
outstanding (a)......... 99 99 99 97 97 96 95
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Net earnings
per share (a)........... $ .69 $ .99 $ 1.82 $ 1.72 $ 1.36 $ 1.15 $ .82
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER FEBRUARY
30, 1996 29, 1996
------ ------
<S> <C>
BALANCE SHEET DATA
Working capital................................... $ 836 $ 905
Total assets...................................... 3,334 2,526
Total debt........................................ 1,025 493
Total stockholders' equity........................ 1,132 1,064
</TABLE>
- ---------------
(a) Following the Offering, the existing common stock will no longer be
outstanding and the Company will no longer report net earnings per share for
the Company on a consolidated basis, but instead will report net
earnings/loss per share for the Circuit City Stock and the CarMax Stock. See
"Summary -- CarMax Group Summary Pro Forma and Historical Financial Data."
49
<PAGE>
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our objective is to manage Circuit City's resources to create maximum
long-term value for the Company's shareholders. We achieve this objective by
adhering to the following policies:
1) We manage our existing business, primarily the current Superstore
markets, to produce the highest possible long-term returns.
2) We make new investments that we believe will increase our earnings and
produce returns above our cost of capital.
The results generated by current operations and by the Company's fiscal
1996 investments are reviewed below.
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
SALES GROWTH
Total sales increased 26 percent in fiscal 1996, to $7.03 billion. In
fiscal 1995, total sales were $5.58 billion, a 35 percent increase from $4.13
billion in fiscal 1994.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
CIRCUIT CITY
---------------------
ALL COMPARABLE INDUSTRY
FISCAL STORES STORES SALES*
- ----------------------------- ------ ---------- --------
1996......................... 26% 5% 6%
1995......................... 35% 15% 11%
1994......................... 26% 8% 7%
1993......................... 17% 7% 7%
1992......................... 18% 1% 0%
- ---------------
* THE INDUSTRY SALES RATES ARE DERIVED FROM ELECTRONIC INDUSTRIES ASSOCIATION,
ASSOCIATION OF HOME APPLIANCE MANUFACTURERS, RECORDING INDUSTRY ASSOCIATION OF
AMERICA AND COMPANY ESTIMATES OF AUDIO, VIDEO, HOME OFFICE,
TELECOMMUNICATIONS, APPLIANCE AND MUSIC SOFTWARE SALES. MUSIC SOFTWARE IS NOT
INCLUDED IN INDUSTRY SALES PRIOR TO FISCAL 1995. IN THOSE YEARS, CIRCUIT CITY
WAS NOT A SIGNIFICANT PARTICIPANT IN THIS CATEGORY.
CIRCUIT CITY OPERATIONS. Circuit City's total sales growth primarily
reflects continued expansion of the Superstore base and strong comparable store
sales growth from Circuit City operations during most of the last three years.
In fiscal 1996, the Company opened a net of 66 Superstores compared with 59
Superstores in the previous fiscal year. Twelve of the fiscal 1996 stores opened
in the last month of the year. The Company entered the following major
metropolitan markets: Buffalo, N.Y.; Denver, Colo.; Hartford, Conn.; Milwaukee,
Wisc.; Rochester, N.Y.; Salt Lake City, Utah; and Springfield, Mass. The Company
also opened stores in smaller markets, added stores to existing markets and
replaced or expanded 15 stores.
The Company operates four Circuit City Superstore formats with square
footage and merchandise assortments tailored to population and volume
expectations for specific trade areas. With these formats, the Company can
penetrate virtually every market in the U.S. The "D" format was developed in
fiscal 1995 to serve the most populous trade areas. Selling space in the "D"
format averages about 23,000 square feet with total square footage averaging
42,242. The "D" stores offer the largest merchandise assortment of all the
formats. The "C" format constitutes the largest percent of the store base.
Selling square footage in this format has been increased during the last several
years, and new "C" stores typically have about 17,000 square feet of selling
space. Total square footage for all "C" stores averages 33,828. The "B" format
often is located in smaller markets or in trade areas that are on the fringes of
larger metropolitan markets. Selling space in these stores averages
approximately 11,000 square feet with an average total square footage of 24,685.
The "B" stores offer a broad merchandise assortment that maximizes return on
investment in these lower volume areas. The "A" format serves the least
populated trade areas. Selling space averages approximately 9,000 square feet,
and total square footage averages 18,026. The "A" stores feature a layout,
staffing levels and merchandise assortment that creates high productivity in the
smallest markets.
The Company also operates 36 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell small, gift-oriented items. During fiscal 1996, the
Company opened five Circuit City Express stores and closed four stores located
in underperforming malls.
50
<PAGE>
STORE MIX
<TABLE>
<CAPTION>
RETAIL UNITS AT YEAR END
----------------------------------------
<S> <C>
FISCAL 1996 1995 1994 1993 1992
- ------------------------------------------------------------------ ---- ---- ---- ---- ----
SUPERSTORE
"D" Superstore.................................................. 61 12 -- -- --
"C" Superstore.................................................. 259 257 219 188 170
"B" Superstore.................................................. 46 37 30 24 11
"A" Superstore.................................................. 12 6 4 2 2
Electronics-Only.................................................. 5 5 7 7 11
Circuit City Express.............................................. 36 35 34 39 34
---- ---- ---- ---- ----
Total........................................................ 419 352 294 260 228
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Over the past three years, industry growth in personal computers has driven
strong comparable store sales increases for the Company. During the first half
of fiscal 1996, rapid PC sales growth and relatively strong demand for consumer
electronics and major appliances contributed to a 10 percent comparable store
sales increase. Challenging prior year sales comparisons and softer industry
sales in all categories led to a more modest increase of 1 percent for the
second half and 5 percent for the full year. Based on market research and sales
performance, the Company believes that it continues to maintain substantial
shares in existing markets and to build significant shares in new markets.
For the Company's core retail business, gross dollar sales from all
extended warranty programs were 5.9 percent of sales in fiscal year 1996,
compared with 5.8 percent in both fiscal 1995 and 1994. Total extended warranty
revenue, which is reported in total sales, was 5.1 percent of sales in fiscal
year 1996, 5.4 percent in fiscal year 1995 and 4.8 percent in fiscal year 1994.
The gross profit margins on products sold with extended warranties are higher
than the gross profit margins on products sold without extended warranties. Late
in fiscal 1994, the Company began selling two new extended warranty programs on
behalf of unrelated third parties that issue these plans for merchandise sold by
the Company and other retailers. One of these programs is sold in most major
markets and features in-home service for personal computer products. The second
program covers electronics and major appliances and at year-end was offered by
approximately two-thirds of the Superstores. The remaining stores sell a Circuit
City extended warranty. Under the third-party programs, Circuit City acts as
seller for the unrelated third parties and has no contractual liability to the
customer under the extended warranty plans. Commission revenue from the
third-party extended warranty plans is recognized immediately while revenue from
Circuit City extended warranties is deferred and amortized on a straight-line
basis over the life of the contracts. In fiscal 1996, the increase in
third-party revenue was more than offset by a decrease in revenue recognized
from Circuit City contracts sold in prior periods. The increase in third-party
warranty sales contributed to the growth in total extended warranty revenue from
fiscal 1994 to fiscal 1995. Third-party extended warranty revenue was 3.0
percent of total sales in fiscal 1996, 2.3 percent in fiscal 1995 and 0.7
percent in fiscal 1994. The Company expects third-party extended warranty
revenue to continue increasing in fiscal 1997.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
FISCAL
1996.............................................. $ 577
1995.............................................. $ 584
1994.............................................. $ 523
1993.............................................. $ 487
1992.............................................. $ 460
SUPERSTORE SALES PER TOTAL SQUARE FOOT. Over the last five years, the
Company has significantly increased the percentage of store square footage
devoted to selling space. Expanded merchandise assortments and additional
product categories such as personal computers and music software contribute to
higher sales per total square foot in some stores. In fiscal 1995, the total
square footage of new stores began to increase. The larger stores generate high
sales volumes in specific trade areas but have lower sales per total square foot
than smaller Superstores. As a result, the Company's Superstore sales per total
square foot declined in fiscal 1996.
51
<PAGE>
SALES BY MERCHANDISE CATEGORIES*
FISCAL 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
TV....................... 17% 19% 20% 23% 23%
VCR/Camcorders........... 13% 14% 17% 19% 20%
Audio.................... 19% 22% 23% 23% 26%
Home Office.............. 26% 20% 12% 7% 5%
Appliances............... 14% 15% 18% 19% 19%
Other.................... 11% 10% 10% 9% 7%
---- ---- ---- ---- ----
Total............... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ---------------
* IN FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM THE "AUDIO" CATEGORY TO
THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS FROM THE "OTHER"
CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS HAVE BEEN
RECLASSIFIED FOR PRIOR YEARS.
SALES BY MERCHANDISE CATEGORIES. Home office products, primarily personal
computers, have increased dramatically as a percentage of the Company's sales
during the past five years. This growth reflects a rapid increase in household
penetration of this product and the strength of Circuit City's consumer offer in
the category. Within the consumer electronics categories, the greatest sales
growth has occurred among the fully featured products such as large-screen
televisions and SurroundSound audio systems. A lack of new product features and
declining retail prices for small-screen televisions and video cassette
recorders have limited sales growth in the video categories. A proliferation of
retail outlets and increased household penetration have reduced cellular phone
sales, which are included in "Other."
IMPACT OF INFLATION. Inflation has not been a significant contributor to
industry growth or to Circuit City's sales growth during the last five years.
The Company expects no significant change in this trend. Because the Company
purchases substantially all products, including consumer electronics, in U.S.
dollars, prices are not directly impacted by the value of the dollar in relation
to other foreign currencies, including the Japanese yen.
CARMAX. During the second half of fiscal 1994, the Company began testing
CarMax: The Auto Superstore, a retail concept that sells used automobiles. The
Company expanded the test to a second location in fiscal 1995 and added two more
locations in fiscal 1996. In January 1996, the Company announced plans to begin
a national rollout of CarMax. CarMax sales totaled $275.9 million in fiscal
1996. CarMax is not included in the reported comparable store sales growth.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin declined to 23.3 percent of sales in fiscal 1996
compared with 24.8 percent in fiscal 1995 and 26.8 percent in fiscal 1994. The
gross profit margin trend reflects growth in personal computer sales, which
produce gross profit margins lower than the Company's average; increased
competition; and a highly promotional climate. The trend also reflects the
addition of CarMax, which generates lower gross margins than the Circuit City
operations, to the sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's lower gross profit margin has been partly offset by
improvements in selling, general and administrative expenses as a percent of
sales. The expense ratio was 18.8 percent of sales in fiscal 1996, 19.8 percent
in fiscal 1995 and 21.6 percent in fiscal 1994. The improvement in the expense
ratio primarily reflects total and comparable store sales growth achieved
throughout the three-year period, an ongoing focus on maximizing store
productivity and productivity of corporate overhead expenditures, a net
contribution from the credit card bank subsidiary and a lower expense structure
for CarMax.
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to SG&A expenses. Throughout the three-year period,
the subsidiary has benefited from a generally low interest rate environment,
which lowers the bank's cost of funds.
INTEREST EXPENSE
Interest expense increased to 0.4 percent of sales in fiscal 1996, from 0.2
percent in fiscal 1995 and 0.1 percent in fiscal 1994. The increase reflects
higher interest rates, the net addition of $369 million of long-term debt since
fiscal 1994 and higher short-term borrowings resulting from the Company's
growth.
INCOME TAXES
The Company's effective income tax rate was 37.5 percent in both fiscal
1996 and fiscal 1995 and 36.7 percent in fiscal 1994. An increase in the federal
statutory income tax rate in fiscal 1994 required a revaluation of the Company's
deferred tax
52
<PAGE>
asset. That revaluation had a favorable impact on the fiscal 1994 provision for
income taxes and resulted in the lower effective tax rate for that fiscal year.
The higher federal statutory income tax rate increased the Company's effective
tax rate for the latter half of fiscal 1994 and throughout fiscal years 1995 and
1996.
NET EARNINGS
Net earnings rose 7 percent to $179.4 million in fiscal 1996. In fiscal
1995, net earnings were $167.9 million, a 27 percent increase from $132.4
million in fiscal 1994. Net earnings per share rose 6 percent in fiscal 1996, to
$1.82, and 26 percent in fiscal 1995, to $1.72 from $1.36 in fiscal 1994. The
Company's investment in the CarMax concept reduced fiscal 1996 net earnings per
share by 7 cents.
RETURN ON SALES
Return on sales was 2.6 percent in fiscal 1996 compared with 3.0 percent in
fiscal 1995 and 3.2 percent in fiscal 1994.
OPERATIONS OUTLOOK
Looking forward, management believes that continued investment in
Superstore expansion will maximize long-term shareholder value. Management
estimates that in fiscal 1997 the remaining markets suitable for Superstore
expansion will represent $37 billion of the consumer electronics, home office,
major appliance and music software industry's total retail sales potential of
$95 billion. By the year 2000, Circuit City expects to expand the Superstore
base into most of these markets. In fiscal 1997, the Company expects to open an
estimated 60 to 65 Superstores, including approximately 20 "D" stores, 32 "C"
stores, 10 "B" stores and three "A" stores. Approximately 35 of the new
Superstores will open in new markets. The Company also plans to replace
approximately 15 to 20 "B" and "C" stores with larger format stores, to open
additional Circuit City Express stores and to open at least three more CarMax
locations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The standard is effective for fiscal years beginning after December 15, 1995.
The Company does not expect the standard to have a material impact on the
Company's financial position or results of operations. This SFAS will be
implemented for the fiscal year ending February 28, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company does not intend to adopt the optional new accounting
method of the standard; however, the additional disclosures required by this
SFAS will be made for the fiscal year ending February 28, 1997. The disclosure
requirements of the standard are effective for fiscal years beginning after
December 15, 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. In fiscal 1996, net cash used in operating activities was $55.3
million compared with $47.0 million provided by operating activities in fiscal
1995 and $108.3 million provided by operating activities in fiscal 1994. The
fiscal 1996 decrease principally reflects the limited earnings growth and lower
increases in the provision for deferred income taxes and in accounts payable.
These changes were partly offset by less rapid growth in merchandise inventory,
reflecting lower sales growth expectations at the end of the fiscal year, and in
accounts receivable, which reflects securitization transactions during the year.
The Company funded capital expenditures of $518.2 million in fiscal 1996
primarily with $251.5 million in proceeds from sales of property and equipment
and proceeds from a five-year, $175 million unsecured bank term loan. The
proceeds from sales of property and equipment include $183.9 million from
sale-leaseback transactions, $49.0 million related to landlord reimbursements
for improvements on leased land and $18.6 million from other sources. Capital
expenditures in fiscal 1996 principally reflect Superstores opened during the
year and a portion of the Superstores opening in fiscal 1997. The sale-leaseback
transactions completed in fiscal 1996 are largely related to real estate
purchased in fiscal years 1996 and 1995. The Company expects to complete
additional sale-leaseback transactions in fiscal 1997. Capital expenditures of
$375.4 million in fiscal 1995 and $252.3 million in fiscal 1994 largely were
incurred in connection with the Superstore expansion program. The expenditures
were funded primarily with net cash provided by operating activities,
sale-leaseback arrangements, and landlord reimbursements. In fiscal 1995, the
Company also utilized proceeds from a seven-year, $100 million unsecured bank
term loan.
The Company's credit card bank subsidiary primarily funds its credit card
programs through securitization transactions, which allow the subsidiary to sell
the receivables while retaining a small interest in the receivables. The
Company's credit
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<PAGE>
card bank subsidiary has a master trust securitization facility for its
private-label credit card that allows the transfer of up to $1.06 billion in
receivables through both private placement and the public market. A second
securitization program allowed, at February 29, 1996, for the transfer of up to
$850 million in receivables related to the subsidiary's bankcard programs. In
fiscal 1996, automobile receivables generated by the Company's installment
lending division were financed with proceeds of $87 million from a
securitization transaction. The Company expects that all securitization programs
can be expanded to accommodate future receivables growth.
As explained in Note 10 to the Consolidated Financial Statements, the
Company has entered into interest rate swap agreements related to the public
issuance of securities by the master trust and the securitization of auto loan
receivables. The interest rate swaps enable the Company to better match funding
costs to the underlying finance charges of the receivables.
CAPITAL STRUCTURE. Total assets at February 29, 1996, were $2.53 billion,
up $522.0 million, or 26 percent since February 28, 1995. The rise in assets
includes increases of $287.4 million in inventory, $181.3 million in net
property and equipment and $59.8 million in net receivables.
The Company has funded expansion with internally generated funds,
sale-leaseback transactions, operating leases and long-term debt. The Company
has funded consumer receivables through securitization transactions. In fiscal
1996, the Company entered into a five-year, $175 million unsecured bank term
loan agreement. As explained in Note 10 to the Consolidated Financial
Statements, the Company has entered into interest rate swap agreements that
effectively convert the loan facility's variable-rate obligation to a fixed-rate
obligation. At February 28, 1995, the Company classified $53 million of
short-term debt as long-term in anticipation of the $175 million loan agreement.
Average short-term debt rose in fiscal 1996 as the Company utilized seasonal
borrowing lines primarily to finance higher inventory needs resulting from more
rapid Superstore expansion and the growth of the CarMax concept. At February 29,
1996, the Company classified $100 million of short-term debt as long-term. The
Company expects to refinance this debt in fiscal 1997 by entering into a
multi-year term loan agreement with a group of banks.
During the period from fiscal 1992 to 1996, stockholders' equity grew
substantially. From fiscal 1995 to 1996, stockholders' equity increased 21
percent to $1.06 billion. Capitalization for the past five years is illustrated
in the "Capitalization" table. Slower earnings growth produced a return on
equity of 18.5 percent in fiscal 1996 compared with 21.1 percent in fiscal 1995.
The fiscal 1996 return was below the Company's long-term objective of 20
percent.
The Company expects to maintain its existing long-term capitalization
strategy in fiscal 1997. Management anticipates that capital expenditures of
approximately $575 million will be funded through a combination of internally
generated funds, sale-leaseback transactions and operating leases and that
securitization transactions will finance the increase in credit card and CarMax
receivables. At the end of fiscal 1996, the Company maintained a multi-year,
$100 million unsecured revolving credit agreement and $255 million in seasonal
lines that are renewed annually with various banks.
CAPITALIZATION
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
FISCAL $ % $ % $ % $ % $ %
- ---------------------------------------- ------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C>
(DOLLAR AMOUNTS IN MILLIONS)
Long-term debt, excluding current
installments.......................... 399.2 23 178.6 14 29.6 3 82.4 9 85.4 12
Other long-term liabilities............. 231.8 14 241.9 19 268.4 27 232.1 26 187.1 26
Total stockholders' equity.............. 1,063.9 63 877.4 67 710.4 70 575.5 65 448.0 62
------- --- ------- --- ------- --- ------- --- ------- ---
Total Capitalization.................... 1,694.9 100 1,297.9 100 1,008.4 100 890.0 100 720.5 100
------- --- ------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- --- ------- ---
</TABLE>
54
<PAGE>
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF FISCAL 1997 VERSUS FIRST NINE
MONTHS OF FISCAL 1996
NET SALES AND OPERATING REVENUES AND GENERAL COMMENTS
Sales for the third quarter of fiscal 1997 were $1.86 billion, an increase
of 5 percent from $1.78 billion in the same period last year. Sales for the
first nine months of fiscal 1997 were $5.25 billion, an increase of 10 percent
from sales of $4.78 billion in the same period last year. The total sales
increase reflects the continued growth of the Company's Circuit City and CarMax
concepts, partly offset by a Circuit City comparable store sales decrease.
Circuit City comparable store sales increases (decreases) for the third
quarter and first nine months of fiscal years 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FY'97 3RD QUARTER NINE MONTHS
- -------------------------- ---------------- ----------------
SEPT OCT NOV FY'97 FY'96 FY'97 FY'96
- ------ ------ ------ ------ ------ ------ ------
<S> <C>
(13%) (9%) (8%) (10%) 3% (7%) 7%
</TABLE>
The third quarter comparable store sales results were below Management's
expectations and reflected the continuation of a challenging industry climate in
which personal computer sales weakened and the consumer electronics sales pace
remained soft. Management expects that comparable store sales will remain soft
as long as industry weakness continues. However, the Company has experienced
comparable store sales growth in major appliances, digital satellite systems and
big-screen televisions. The Company expects to continue producing above-average
results in product segments where its selection and high-service strategy create
significant competitive advantages.
During the quarter, the Company opened 36 new Circuit City Superstores,
including its first three in Pittsburgh, Penn., entries into numerous smaller
markets and additions in existing markets. The Company also replaced or expanded
eight Superstores and opened six mall-based Circuit City Express locations. By
the end of the first nine months, the Company had opened 51 Superstores and
replaced or expanded 16. By fiscal year-end, the Company plans to have opened
approximately 65 Superstores and replaced approximately 20 existing stores.
The table below details Circuit City retail units:
<TABLE>
<CAPTION>
STORES OPEN AT
END OF QUARTER
------------------------------ ESTIMATE
NOV. 30, 1996 NOV. 30, 1995 FEB. 28, 1997
------------- ------------- -------------
<S> <C>
SUPERSTORE
"D" Superstore................................................... 94 52 94
"C" Superstore................................................... 271 260 278
"B" Superstore................................................... 51 43 54
"A" Superstore................................................... 13 11 17
Electronics-Only................................................... 5 5 5
Circuit City Express............................................... 47 37 47
--- --- ---
Total.............................................................. 481 408 495
--- --- ---
--- --- ---
<CAPTION>
FEB. 29, 1996
-------------
<S> <C>
SUPERSTORE
"D" Superstore................................................... 61
"C" Superstore................................................... 259
"B" Superstore................................................... 46
"A" Superstore................................................... 12
Electronics-Only................................................... 5
Circuit City Express............................................... 36
---
Total.............................................................. 419
---
---
</TABLE>
In mid-June, the Company announced a five-year expansion plan for CarMax:
The Auto Superstore(Register mark). The Company began the first phase of its
national roll out of CarMax with the opening of its Orlando, Fla., location on
November 6, 1996. The Company currently operates six CarMax stores. By calendar
year 2001, the Company expects to be operating 80 to 90 CarMax stores. The
Company expects to enter the Tampa, Fla., market before the end of the current
fiscal year. In fiscal 1998, the Company plans to open another eight to 10
CarMax locations and, thereafter, to accelerate the opening program by adding 15
to 20 stores per year.
For the Company's Circuit City business, gross dollar sales from all
extended warranty programs were 6.1 percent of sales in the third quarter of
both fiscal years 1997 and 1996. Third-party warranty revenue rose to 3.7
percent of sales in this year's third quarter from 3.1 percent in the same
period last year. The total extended warranty revenue that is reported in total
sales was 5.2 percent of sales in this year's third quarter versus 5.1 percent
in the third quarter of last year.
55
<PAGE>
Total sales by merchandise categories are listed below:
<TABLE>
<CAPTION>
3RD QUARTER NINE MONTHS
-------------------------- -----------
FISCAL 1997 FISCAL 1996 FISCAL 1997
----------- ----------- -----------
<S> <C>
TV.......................................................................... 20% 19% 18%
VCR/Camcorders.............................................................. 13 13 14
Audio*...................................................................... 17 18 17
Home Office................................................................. 25 28 24
Appliances.................................................................. 15 13 17
Other*...................................................................... 10 9 10
--- --- ---
Total..................................................................... 100% 100% 100%
--- --- ---
--- --- ---
<CAPTION>
FISCAL 1996
-----------
<S> <C>
TV.......................................................................... 17%
VCR/Camcorders.............................................................. 14
Audio*...................................................................... 18
Home Office................................................................. 25
Appliances.................................................................. 16
Other*...................................................................... 10
---
Total..................................................................... 100%
---
---
</TABLE>
- ---------------
* IN THE FOURTH QUARTER OF FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM
THE "AUDIO" CATEGORY TO THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS
FROM THE "OTHER" CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS
HAVE BEEN RECLASSIFIED FOR THE PRIOR YEAR QUARTERS.
The Company's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Company has realized more of
its net sales and net earnings in the final fiscal quarter, which includes the
Christmas season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin was 22.7 percent of sales in the third quarter of
both fiscal years 1997 and 1996. The gross margins for the nine months ended
November 30, 1996 and 1995, were 22.5 percent and 22.9 percent, respectively.
A more profitable merchandise mix for Circuit City offset lower gross
margins produced by an intense promotional climate and increased sales from
CarMax. The competitive climate in the electronics business will continue to put
pressure on gross margins, and the increased sales volume from CarMax, which is
a lower gross margin business, is expected to continue reducing consolidated
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expense ratio increased
from 19.4 percent of sales in the third quarter of last year to 20.5 percent for
the same period this year. For the nine-month period ended November 30, 1996,
the expense ratio was 20.0 percent versus 19.3 percent in the same period last
year.
The higher ratio primarily reflects the impact of lower comparable store
sales, partly offset by the increased contribution from the credit card bank
subsidiary and the lower cost structure for CarMax.
INCOME TAXES
The effective income tax rate was 38.0 percent in the third quarter and
first nine months of fiscal 1997 versus 37.5 percent in the same periods last
year. Management expects the effective rate to remain at 38.0 percent in the
fourth quarter.
NET EARNINGS
Net earnings for the quarter ended November 30, 1996, decreased 37 percent
to $19.8 million from $31.5 million in the same period last year. Net earnings
per share declined 38 percent to 20 cents from 32 cents.
Net earnings for the nine months ended November 30, 1996, were $68.2
million, a decrease of 30 percent from $97.3 million in the same period last
year. Net earnings per share decreased 30 percent to 69 cents from 99 cents.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The standard is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and shall be applied
prospectively. The Company does not expect the standard to have a material
impact on financial position or results of operations.
56
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Total assets at November 30, 1996, were $3,333.5 million, up $807.5 million
or 32 percent since February 29, 1996. The largest contributor to the asset
increase was a $563.7 million increase in inventory to support new store
openings and the holiday season sales volume. Net accounts and notes receivable
increased by $113.1 million, primarily due to an increase in credit card
accounts generated by the Company's credit card bank subsidiary. Property and
equipment increased $126.0 million, largely because of planned and completed
store openings.
Accounts payable increased $299.9 million and short-term debt has increased
$501.1 million since the end of fiscal 1996 to support new store expansion and
the purchase of inventory.
The Company's credit card bank subsidiary has a master trust securitization
facility for its private-label credit card that allows the transfer of
receivables through private placement and the public market. During the quarter
ended November 30, 1996, the credit card bank subsidiary issued an additional
$225 million to the public market or to private investors for a total program
capacity of $1.29 billion. The master trust vehicle permits further expansion of
the securitization program to meet future needs. In addition, the Company's
credit card bank subsidiary has an asset securitization program that allows the
transfer of up to $1.45 billion in receivables related to its other bank card
programs. The Company also has an asset securitization program that allows the
transfer of up to $175 million in auto loan receivables. The Company anticipates
that it will be able to expand its securitization programs to meet future needs.
The Company expects to continue its existing long-term capitalization
strategy. Management anticipates that capital expenditures will be funded
through a combination of internally generated funds, sale-leaseback
transactions, operating leases and proceeds of the recent long-term debt
agreement and the Offering and that securitization transactions will be used to
finance the growth in credit card and auto loan receivables. At November 30,
1996, $150 million was drawn on the unsecured revolving bank credit facility and
is included in short-term debt. As of January 9, 1997, the $150 million drawn on
the unsecured revolving bank credit facility had been repaid by the Company. The
Company also maintained $415 million in seasonal lines that are renewed annually
with various banks.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the Company. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk Factors"
and in the Company's 1996 Annual Report on Form 10-K. See "Cautionary Statement
Regarding Forward-Looking Statements."
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Amended and Restated Articles of Incorporation (the
"Articles") currently provide that the Company is authorized to issue
252,000,000 shares of stock, consisting of 250,000,000 shares of common stock,
par value $.50 per share, and 2,000,000 shares of Preferred Stock, par value
$20.00 per share, issuable in series by the Board of Directors, of which, as of
December 31, 1996, 500,000 shares were designated as Cumulative Participating
Preferred Stock, Series E (the "Series E Preferred Stock"). As of December 31,
1996, the Company had issued and outstanding 98,008,841 shares of common stock
and no shares of Preferred Stock.
Prior to the delivery of the CarMax Stock in the Offering, the Company will
file with the Virginia State Corporation Commission certain amendments (the
forms of which have been filed as an exhibit to the Registration Statement of
which this Prospectus is a part) to the Articles that will, among other things,
provide for (i) the issuance of the Company's common stock in series and the
Common Stock Redesignation (the "CarMax Stock Proposal Amendments") and (ii) an
increase in the number of shares of common stock authorized for issuance from
250,000,000 to 350,000,000 (such amendment, together with the CarMax Stock
Proposal Amendments, the "Amendments"). The Articles as amended by the
Amendments are referred to herein as the "Amended Articles." Of the Company's
common stock, 175,000,000 shares initially will be designated as CarMax Stock
and 175,000,000 shares initially will be designated as Circuit City Stock. The
Circuit City Stock and the CarMax Stock are referred to herein as the "Common
Stock." The Board of Directors will have the authority to increase or decrease
from time to time the total number of authorized shares comprising each series
of Common Stock but not above a number which, when added to the aggregate number
of authorized shares of all other series of Common Stock, would exceed the total
authorized number of shares of Common Stock, and not below the number of shares
of such series then outstanding.
The authorized but unissued shares of CarMax Stock and Circuit City Stock
would be available for issuance by the Company from time to time, as determined
by the Board of Directors, for any proper corporate purpose, which could include
raising capital, paying stock dividends, providing compensation or benefits to
employees or acquiring other companies or businesses. The approval of the
shareholders of the Company will not be solicited by the Company for the
issuance from the authorized but unissued shares of Common Stock of additional
shares of CarMax Stock or Circuit City Stock (including from shares that were
previously designated as part of the other series but are unissued) unless such
approval is deemed advisable by the Board of Directors or required by stock
exchange regulations or under the VSCA.
The following is a description of the terms of the capital stock of the
Company following the filing of the Amendments with the Virginia State
Corporation Commission. This description does not purport to be complete and is
qualified in its entirety by reference to the Articles and the Amendments.
DIVIDENDS
Dividends on the CarMax Stock and the Circuit City Stock are limited to
legally available assets of the Company under the VSCA and subject to the prior
payment of dividends on any outstanding shares of Preferred Stock. Under the
VSCA, no distribution may be made to shareholders if, after giving effect to
such distribution, the Company would not be able to pay its debts as they become
due in the usual course of business or the Company's total assets would be less
than its total liabilities plus, subject to certain exceptions, any amounts
necessary to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those of the shareholders receiving
the distribution. Assuming the Offering had been completed as of November 30,
1996, the legally available assets of the Company, based on its balance sheet as
of such date, would have been $1.47 billion assuming the over-allotment option
was not exercised, or $1.52 billion assuming that such option was exercised in
full, subject to the Company's ability to continue to pay its debts as they
become due in the usual course of business after having distributed any such
amount.
Dividends on the CarMax Stock and the Circuit City Stock are further
limited to an amount not in excess of the CarMax Group Available Dividend Amount
and the Circuit City Group Available Dividend Amount, respectively. The
Available Dividend Amount with respect to a Group is intended to be similar to
the amount that would be legally available for the payment of dividends on the
stock of such Group under the VSCA if such Group were a separate company. There
can be no assurance that there will be an Available Dividend Amount with respect
to the CarMax Group.
The "CarMax Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) the product of (x) the Outstanding CarMax Fraction and (y) an
amount equal to the total assets of the CarMax Group less its total
liabilities as of such date determined in accordance with generally
accepted accounting principles as
58
<PAGE>
in effect at such time applied on a basis consistent with that applied in
determining the CarMax Group Net Earnings (Loss), over
(ii) except to the extent that the Amended Articles permit otherwise,
the amount that would be needed to satisfy the preferential rights to which
holders of any Preferred Stock attributed to the CarMax Group are entitled
upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the CarMax Group would be able to pay its debts as they become due in the usual
course of business. For the definition of "Outstanding CarMax Fraction," see
" -- Inter-Group Interest."
The "Circuit City Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) an amount equal to the total assets of the Circuit City Group less
its total liabilities as of such date determined in accordance with
generally accepted accounting principles as in effect at such time applied
on a basis consistent with that applied in determining the Circuit City
Group Net Earnings (Loss), over
(ii) except to the extent that the Amended Articles permit otherwise,
the amount that would be needed to satisfy the preferential rights to which
holders of Preferred Stock attributed to the Circuit City Group are
entitled upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the Circuit City Group would be able to pay its debts as they become due in the
usual course of business.
Assuming the Offering and the Common Stock Redesignation had been completed
on November 30, 1996, based on each Group's respective balance sheets as of such
date (and assuming an Outstanding CarMax Fraction of 20% without giving effect
to the CarMax Stock Options), the CarMax Group Available Dividend Amount and the
Circuit City Group Available Dividend Amount at such date would have been $65
million and $1.41 billion respectively, assuming the U.S. Underwriters'
over-allotment option was not exercised, or $75 million and $1.45 billion
million respectively, assuming that such option was exercised in full, subject
in all such cases to the Group's ability to continue to pay its debts as they
become due in the usual course of business after having distributed any such
amount and in each case assuming no exercise of the CarMax Stock Options.
The VSCA limits the amount of distributions on capital stock to the legally
available assets of the Company, which are determined on the basis of the entire
Company, and not just the respective Groups. Consequently, the amount of legally
available assets would reflect the amount of any net losses of any Group, any
distributions on CarMax Stock, Circuit City Stock or any Preferred Stock and any
repurchases of CarMax Stock, Circuit City Stock or certain Preferred Stock.
Dividend payments on the CarMax Stock and on the Circuit City Stock could be
precluded because of the unavailability of legally available assets under the
VSCA, even though the Available Dividend Amount test with respect to the
relevant Group was met.
Subject to the prior payment of dividends on any outstanding shares of
Preferred Stock and the foregoing limitations, the Board of Directors would be
able, in its sole discretion, to declare and pay dividends exclusively on the
CarMax Stock, exclusively on the Circuit City Stock or on both, in equal or
unequal amounts, notwithstanding the relative amounts of the CarMax Group
Available Dividend Amount and the Circuit City Group Available Dividend Amount,
the amount of prior dividends declared on each series, the respective voting or
liquidation rights of each series or any other factor.
"CarMax Group" means, as of any date (i) all businesses, assets and
liabilities of each of CarMax Auto Superstores, Inc., a Virginia corporation,
CarMax, Inc., a Virginia corporation, and C-Max Auto Superstore, Inc., a
California corporation (the "CarMax Group Companies") as of the date of the
first issuance of CarMax Stock; (ii) all assets and liabilities of the Company
and its subsidiaries attributed by the Board of Directors to the CarMax Group,
whether or not such assets or liabilities are or were also assets and
liabilities of any of the CarMax Group Companies; (iii) all properties and
assets transferred to the CarMax Group from the Circuit City Group (other than a
transaction contemplated by clause (iv) below) pursuant to transactions in the
ordinary course of business of both the CarMax Group and the Circuit City Group
or otherwise as the Board of Directors may have directed as permitted by the
Articles; (iv) all properties and assets transferred to the CarMax Group from
the Circuit City Group in connection with an increase in the Number of Shares
Issuable with Respect to the Inter-Group Interest; and (v) the interest of the
Company or any of its subsidiaries in any business or asset acquired and any
liabilities assumed by the Company or any of its subsidiaries outside of the
ordinary course of business and attributed to the CarMax Group by the Board of
Directors as permitted by the Amended Articles; provided, that from and after
any transfer of any assets or properties from the CarMax Group to the Circuit
City Group, the CarMax Group shall no longer include such
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assets or properties so contributed or transferred. After the payment date of
any dividend, redemption or other distribution with respect to shares of CarMax
Stock (other than a dividend or other distribution payable in shares of CarMax
Stock or in securities of the Company attributed to the CarMax Group), the
CarMax Group shall no longer include an amount of assets or properties
previously attributed to the CarMax Group of the same kind as so paid in such
dividend or other distribution with respect of shares of CarMax Stock as have a
Fair Value on the record date for such dividend or distribution equal to the
product of (a) the Fair Value on such record date of the aggregate of such
dividend or distribution to holders of shares of CarMax Stock declared
multiplied by (b) a fraction the numerator of which is equal to the Inter-Group
Interest Fraction in effect on the record date for such dividend or distribution
and the denominator of which is equal to the Outstanding CarMax Fraction in
effect on the record date for such dividend or distribution. If the Company pays
a dividend or makes a distribution with respect to shares of CarMax Stock
payable in securities of the Company (other than CarMax Stock), there shall be
excluded from the CarMax Group an interest in the CarMax Group equal to the
product of the number or amount of securities so distributed to holders of
CarMax Stock multiplied by the fraction specified in clause (b) of the preceding
sentence (determined as of the record date for such distribution). To the extent
interest is or dividends are paid on securities so distributed, the CarMax Group
shall no longer include a corresponding ratable amount of the kind of assets
paid as such interest or dividends as would have been paid in respect of the
securities equivalent to such interest in the CarMax Group deemed held by the
Circuit City Group if the securities equivalent to such interest were
outstanding.
"CarMax Group Net Earnings (Loss)," for any period through any date, means
the net income or loss of the CarMax Group for such period (or in respect of the
fiscal periods of the Company commencing prior to the date of the first issuance
of the CarMax Stock, the pro forma net income or loss of the CarMax Group for
such period as if such date had been the first day of such period) determined in
accordance with generally accepted accounting principles as in effect at such
time, reflecting income and expense of the Company attributed to the CarMax
Group on a basis substantially consistent with attributions of income and
expense made in the calculation of the Circuit City Group Net Earnings (Loss),
including, without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
"Circuit City Group" means, as of any date, (i) the interest of the Company
or any of its subsidiaries on such date in all of the assets, liabilities and
businesses of the Company or any of its subsidiaries (and any successor
companies), other than any assets, liabilities and businesses attributed to the
CarMax Group; (ii) a proportionate undivided interest in each and every
business, asset and liability attributed to the CarMax Group equal to the
Inter-Group Interest Fraction as of such date; (iii) all properties and assets
transferred to the Circuit City Group from the CarMax Group (other than as
contemplated by clause (iv) below) pursuant to transactions in the ordinary
course of business of both the CarMax Group and the Circuit City Group or
otherwise as the Board of Directors may have directed as permitted by the
Amended Articles; (iv) all properties and assets transferred to the Circuit City
Group from the CarMax Group in connection with a reduction of the Number of
Shares Issuable with Respect to the Inter-Group Interest; (v) the interest of
the Company or any of its subsidiaries in any business or asset acquired and any
liabilities assumed by the Company or any of its subsidiaries outside the
ordinary course of business and attributed to the Circuit City Group, as
determined by the Board of Directors; (vi) from and after the payment date of
any dividend, redemption or other distribution with respect to shares of CarMax
Stock (other than a dividend or other distribution payable in shares of CarMax
Stock or in securities of the Company attributed to the CarMax Group), an amount
of assets or properties previously attributed to the CarMax Group of the same
kind as were paid in such dividend or other distribution with respect to shares
of CarMax Stock as have a Fair Value on the record date for such dividend or
distribution equal to the product of (1) the Fair Value on such record date of
the aggregate of such dividend or distribution to holders of shares of CarMax
Stock declared multiplied by (2) a fraction the numerator of which is equal to
the Inter-Group Interest Fraction in effect on the record date for such dividend
or distribution and the denominator of which is equal to the Outstanding CarMax
Fraction in effect on the record date for such dividend or distribution; and
(vii) if the Company pays a dividend or makes a distribution with respect to
shares of the CarMax Stock payable in securities of the Company (other than
CarMax Stock), an interest in the CarMax Group equal to the product of the
number or amount of such securities so distributed to holders of CarMax Stock
multiplied by a fraction the numerator of which is equal to the Inter-Group
Interest Fraction and the denominator of which is equal to the Outstanding
CarMax Fraction (determined as of the record date for such distribution);
provided, that from and after any transfer of any assets or properties from the
Circuit City Group to the CarMax Group, the Circuit City Group shall no longer
include such assets or properties so transferred (other than as contemplated by
clause (ii) above).
"Circuit City Group Net Earnings (Loss)," for any period through any date,
means the net income or loss of the Circuit City Group for such period (or in
respect of fiscal periods of the Company commencing prior to the date of the
first issuance of CarMax Stock, the pro forma net income or loss of the Circuit
City Group for such period as if such date had been the first day of such
period) determined in accordance with generally accepted accounting principles
in effect at such time, reflecting income and expense of the Company attributed
to the Circuit City Group on a basis substantially consistent with attributions
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of income and expense made in the calculation of CarMax Group Net Earnings
(Loss), including, without limitation, corporate administrative costs, net
interest and other financial costs and income taxes.
CONVERSION AND REDEMPTION
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF COMMON STOCK
Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise), in
one transaction or a series of related transactions (a "Disposition"), by the
Company of all or substantially all of the properties and assets attributed to
either Group to one or more persons or entities (other than (w) the Disposition
by the Company of all or substantially all of the Company's properties and
assets in one transaction or a series of related transactions in connection with
the liquidation, dissolution or termination of the Company and the distribution
of assets to shareholders, (x) on a pro rata basis to the holders of all
outstanding shares of the series of Common Stock relating to such Group and, in
the case of a Disposition of the properties and assets attributed to the CarMax
Group, to the Company for the benefit of the Circuit City Group with respect to
the Number of Shares Issuable with Respect to the Inter-Group Interest, if any,
(y) to any person or entity controlled by the Company (as determined by the
Board of Directors) or (z) in connection with a Related Business Transaction),
the Company is required, on or prior to the 85th Trading Day following the
consummation of such Disposition, to either:
(1) provided that there are assets of the Company legally available
therefor:
(i) subject to the limitations described above in the second paragraph
under " -- Dividends," declare and pay a dividend in cash and/or securities
(other than Common Stock) or other property to the holders of outstanding
shares of the series of Common Stock relating to the Group subject to such
Disposition having a Fair Value as of the date of such consummation equal
in the aggregate to (I) in the case of a Disposition of the properties and
assets attributed to the CarMax Group, the product of the Outstanding
CarMax Fraction as of the record date for determining holders entitled to
receive such dividend multiplied by the Fair Value of the Net Proceeds of
such Disposition and (II) in the case of a Disposition of the properties
and assets attributed to the Circuit City Group, the Fair Value of the Net
Proceeds of such Disposition; or
(ii) (A) if such Disposition involves all (not merely substantially
all) of the properties and assets attributed to such Group, redeem all
outstanding shares of Common Stock relating to the Group subject to such
Disposition in exchange for cash and/or securities (other than Common
Stock) or other property having a Fair Value as of the date of such
consummation in the aggregate equal to (I) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the product of
the Outstanding CarMax Fraction as of such redemption date multiplied by
the Fair Value of the Net Proceeds of such Disposition and (II) in the case
of a Disposition of the properties and assets attributed to the Circuit
City Group, the Fair Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets attributed to such Group, redeem such number of
whole shares of the series of Common Stock relating to the Group subject to
such Disposition (but in any event not more than the number of shares of
such series of Common Stock outstanding) as have in the aggregate an
average Market Value, during the 10-Trading Day period beginning on the
16th Trading Day immediately succeeding such consummation, closest to (I)
in the case of a Disposition of the properties and assets attributed to the
CarMax Group, the product of the Outstanding CarMax Fraction as of the date
such shares are selected for redemption multiplied by the Fair Value of the
Net Proceeds of such Disposition as of the date of such consummation or
(II) in the case of a Disposition of the properties and assets attributed
to the Circuit City Group, the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation, in either case in
consideration for cash and/or securities (other than Common Stock) or other
property having a Fair Value in the aggregate equal to such Fair Value of
the Net Proceeds or such product, as applicable;
provided, however, that the Company may only redeem shares of a series of
Common Stock pursuant to this paragraph (ii) if the Fair Value of the Net
Proceeds to be paid in redemption of such series is less than or equal to
the Available Dividend Amount with respect to the Group subject to such
Disposition; or
(2) convert each outstanding share of the series of Common Stock relating
to the Group subject to such Disposition into a number of fully paid and
nonassessable shares of the series of Common Stock relating to the other
Group (or, if the Common Stock relating to the other Group is not Publicly
Traded at such time and shares of another class or series of common stock
of the Company (other than the series of Common Stock relating to the Group
subject to such Disposition) are then Publicly Traded, of such other class
or series of common stock as has the largest Market Capitalization as
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of the close of business on the Trading Day immediately preceding the date
of the notice of such conversion mailed to holders), equal to 110% of the
ratio (rounded to the nearest five decimal places) of the average Market
Value of one share of Common Stock relating to the Group subject to such
Disposition to the average Market Value of one share of Common Stock
relating to the other Group (or such other class or series of common stock,
as the case may be), during the 10-Trading Day period beginning on the 16th
Trading Day following such consummation.
The Board of Directors may, within one year after a dividend or redemption
described above in this section, convert each outstanding share of the series of
Common Stock relating to the Group subject to such Disposition into a number of
fully paid and nonassessable shares of the series of Common Stock relating to
the other Group (or, if the series of Common Stock relating to the other Group
is not Publicly Traded at such time and shares of another class or series of
common stock of the Company (other than the series of Common Stock relating to
the Group subject to such Disposition) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization as of
the close of business on the Trading Day immediately preceding the date of the
notice of such conversion mailed to holders) equal to 110% of the Market Value
Ratio of the Circuit City Stock to the CarMax Stock, if the Circuit City Stock
is to be converted into CarMax Stock, or the Market Value Ratio of the CarMax
Stock to the Circuit City Stock, if the CarMax Stock is to be converted into
Circuit City Stock, as of the fifth Trading Day prior to the date of the notice
of such conversion mailed to such holders. Any such exchange would dilute the
interest in the Company of holders of the series of Common Stock relating to the
Group not subject to the Disposition and would preclude holders of both series
of Common Stock from retaining their investment in a security reflecting
separately the business of their respective Group. In determining whether to
effect any such conversion following such a dividend or partial redemption, the
Board of Directors, in its sole discretion and consistent with its fiduciary
duties, in addition to other matters, would likely consider whether the
remaining properties and assets attributed to the Group subject to the
Disposition continue to constitute a viable business. Other considerations could
include the number of shares of Common Stock relating to such Group remaining
issued and outstanding, the per share market price of such Common Stock and the
cost of maintaining shareholder accounts.
The Company may elect to pay the dividend or redemption price referred to
in clause (1)(i) or (1)(ii) of the first paragraph under " -- Mandatory
Dividend, Redemption or Conversion of Common Stock" either in the same form as
the proceeds of the Disposition were received or in any other combination of
cash, securities (other than Common Stock) or other property that the Board of
Directors or, in the case of equity securities or debt securities that have not
been Publicly Traded for a period of at least 15 months, an independent
investment banking firm, determines will have an aggregate market value of not
less than the amount of the Fair Value of the Net Proceeds.
As used herein:
"Convertible Securities" at any time means any securities of the
Company or of any subsidiary thereof (other than shares of the Common
Stock), including warrants and options, outstanding at such time that by
their terms are convertible into or exchangeable or exercisable for or
evidence the right to acquire any shares of either series of the Common
Stock, whether convertible, exchangeable or exercisable at such time or a
later time or only upon the occurrence of certain events, but in respect of
antidilution provisions of such securities only upon the effectiveness
thereof.
"Fair Value" means, (i) in the case of equity securities or debt
securities of a class or series that has previously been Publicly Traded
for a period of at least 15 months, the Market Value thereof (if such
Market Value, as so defined, can be determined); (ii) in the case of an
equity security or debt security that has not been Publicly Traded for at
least 15 months or the Market Value of which cannot be determined, the fair
value per share of stock or per other unit of such security, on a fully
distributed basis, as determined by an independent investment banking firm
experienced in the valuation of securities selected in good faith by the
Board of Directors, or, if no such investment banking firm is, as
determined in the good faith judgment of the Board of Directors, available
to make such determination, in good faith by the Board of Directors; (iii)
in the case of cash denominated in U.S. dollars, the face amount thereof
and in the case of cash denominated in other than U.S. dollars, the face
amount thereof converted into U.S. dollars at the rate published in THE
WALL STREET JOURNAL on the date for the determination of Fair Value or, if
not so published, at such rate as shall be determined in good faith by the
Board of Directors based upon such information as the Board of Directors
shall in good faith determine to be appropriate in accordance with good
business practice; and (iv) in the case of property other than securities
or cash, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine
to be appropriate in accordance with good business practice. Any such
determination of Fair Value shall be described in a statement filed with
the records of the actions of the Board of Directors.
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"Market Capitalization" of any class or series of common stock on any
date means the product of (i) the Market Value of one share of such class
or series of common stock on such date and (ii) the number of shares of
such class or series of common stock outstanding on such date.
"Market Value" of a share of any class or series of capital stock of
the Company on any day means the average of the high and low reported sales
prices regular way of a share of such class or series on such Trading Day
or, in case no such reported sale takes place on such Trading Day, the
average of the reported closing bid and asked prices regular way of a share
of such class or series on such Trading Day, in either case as reported on
the NYSE Composite Tape or, if the shares of such class or series are not
listed or admitted to trading on the NYSE on such Trading Day, on the
principal national securities exchange in the United States on which the
shares of such class or series are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange on such
Trading Day, The Nasdaq National Market System of the Nasdaq Stock Market
("Nasdaq NMS") or, if the shares of such class or series are not listed or
admitted to trading on any national securities exchange or quoted on Nasdaq
NMS on such Trading Day, the average of the closing bid and asked prices of
a share of such class or series in the over-the-counter market on such
Trading Day as furnished by any NYSE member firm selected from time to time
by the Company or, if such closing bid and asked prices are not made
available by any such NYSE member firm on such Trading Day, the Fair Value
of a share of such class or series; PROVIDED, that, for purposes of
determining the market value of a share of any class or series of capital
stock for any period, (i) the "Market Value" of a share of capital stock on
any day prior to any "ex-dividend" date or any similar date occurring
during such period for any dividend or distribution (other than any
dividend or distribution contemplated by clause (ii)(B) of this sentence)
paid or to be paid with respect to such capital stock shall be reduced by
the Fair Value of the per share amount of such dividend or distribution and
(ii) the "Market Value" of any share of capital stock on any day prior to
(A) the effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of
such class or series of capital stock occurring during such period or (B)
any "ex-dividend" date or any similar date occurring during such period for
any dividend or distribution with respect to such capital stock to be made
in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class
or series of capital stock shall be appropriately adjusted, as determined
by the Board of Directors, to reflect such subdivision, combination,
dividend or distribution.
"Market Value Ratio of the CarMax Stock to the Circuit City Stock" as
of any date means the fraction (which may be greater than 1/1), expressed
as a decimal (rounded to the nearest five decimal places), of a share of
Circuit City Stock (or another class or series of common stock of the
Company, if Circuit City Stock is not then Publicly Traded) to be issued in
respect of a share of CarMax Stock upon a conversion of CarMax Stock into
Circuit City Stock (or another class or series of common stock of the
Company), based on the ratio of the Market Value of a share of CarMax Stock
to the Market Value of a share of Circuit City Stock (or such other common
stock) as of such date, determined by the fraction the numerator of which
shall be the sum of (A) four times the average Market Value of one share of
CarMax Stock over the period of five consecutive Trading Days ending on
such date, (B) three times the average Market Value of one share of CarMax
Stock over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value of
one share of CarMax Stock over the period of five consecutive Trading Days
ending on the 10th Trading Day prior to such date and (D) the average
Market Value of one share of CarMax Stock over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such date
and the denominator of which shall be the sum of (A) four times the average
Market Value of one share of Circuit City Stock (or such other common
stock) over the period of five consecutive Trading Days ending on such
date, (B) three times the average Market Value of one share of Circuit City
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the fifth Trading Day prior to such date, (C) two
times the average Market Value of one share of Circuit City Stock (or such
other common stock) over the period of five consecutive Trading Days ending
on the 10th Trading Day prior to such date and (D) the average Market Value
of one share of Circuit City Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 15th Trading Day
prior to such date.
"Market Value Ratio of the Circuit City Stock to the CarMax Stock" as
of any date means the fraction (which may be greater or less than 1/1),
expressed as a decimal (rounded to the nearest five decimal places), of a
share of CarMax Stock (or another class or series of common stock of the
Company, if CarMax Stock is not then Publicly Traded) to be issued in
respect of a share of Circuit City Stock upon a conversion of Circuit City
Stock into CarMax Stock (or another class or series of common stock of the
Company), based on the ratio of the Market Value of a share of Circuit City
Stock to the Market Value of a share of CarMax Stock (or such other common
stock) as of such date, determined by the fraction the numerator of which
shall be the sum of (A) four times the average Market Value of one share of
Circuit City
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Stock over the period of five consecutive Trading Days ending on such date,
(B) three times the average Market Value of one share of Circuit City Stock
over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value of
one share of Circuit City Stock over the period of five consecutive Trading
Days ending on the 10th Trading Day prior to such date and (D) the average
Market Value of one share of Circuit City Stock over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such date
and the denominator of which shall be the sum of (A) four times the average
Market Value of one share of CarMax Stock (or such other common stock) over
the period of five consecutive Trading Days ending on such date, (B) three
times the average Market Value of one share of CarMax Stock (or such other
common stock) over the period of five consecutive Trading Days ending on
the fifth Trading Day prior to such date, (C) two times the average Market
Value of one share of CarMax Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 10th Trading Day
prior to such date and (D) the average Market Value of one share of CarMax
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the 15th Trading Day prior to such date.
The "Net Proceeds" of a Disposition of any of the properties and
assets attributed to either Group means, as of any date, an amount, if any,
equal to what remains of the gross proceeds of such Disposition after any
payment of, or reasonable provision is made as determined by the Board of
Directors for, (a) any taxes payable by the Company (or which would have
been payable but for the utilization of tax benefits attributable to the
other Group) in respect of such Disposition or in respect of any resulting
dividend or redemption, (b) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses
and (c) any liabilities (contingent or otherwise) of or attributed to such
Group, including, without limitation, any liabilities for deferred taxes or
any indemnity or guarantee obligations of the Company incurred in
connection with the Disposition or otherwise and any liabilities for future
purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of the Preferred Stock
attributed to such Group.
"Publicly Traded" with respect to any security means (i) registered
under Section 12 of the Securities Exchange Act of 1934, as amended (or any
successor provision of law), and (ii) listed for trading on the NYSE or the
American Stock Exchange (or any national securities exchange registered
under Section 7 of the Securities Exchange Act of 1934, as amended (or any
successor provision of law), that is the successor to either such exchange)
or listed on Nasdaq NMS (or any successor market system).
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets attributed to either Group
in a transaction or series of related transactions that result in the
Company receiving in consideration of such properties and assets primarily
equity securities (including, without limitation, capital stock, debt
securities convertible into or exchangeable for equity securities or
interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity which (i) acquires such properties or
assets or succeeds (by merger, formation of a joint venture or otherwise)
to the business conducted with such properties or assets or controls such
acquiror or successor and (ii) is primarily engaged or proposes to engage
primarily in one or more businesses similar or complementary to the
businesses conducted by such Group prior to such Disposition, as determined
by the Board of Directors. The purpose of the Related Business Transaction
exception is to enable the Company technically to "dispose" of properties
or assets of a Group to other entities engaged or proposing to engage in
businesses similar or complementary to those of the series of Common Stock
of such Group without resulting in a dividend on, or a conversion or
redemption of, the series of Common Stock of such Group.
"Substantially all of the properties and assets" attributed to either
Group means a portion of such properties and assets (i) that represents at
least 80% of the then Fair Value of the properties and assets attributed to
such Group or (ii) from which were derived at least 80% of the aggregate
revenues for the immediately preceding 12 fiscal quarterly periods of the
Company derived from the properties and assets of such Group as of such
date.
"Trading Day" means each weekday other than any day on which the
relevant series of Common Stock is not traded on any national securities
exchange or quoted in Nasdaq NMS or in the over-the-counter market.
CONVERSION OF COMMON STOCK AT OPTION OF THE COMPANY
The Board of Directors may at any time convert each outstanding share of
CarMax Stock into a number of fully paid and nonassessable shares of Circuit
City Stock (or, if Circuit City Stock is not Publicly Traded at such time and
shares of another class or series of common stock of the Company (other than
CarMax Stock) are then Publicly Traded, of such other
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class or series of common stock of the Company as has the largest Market
Capitalization as of the close of business on the Trading Day immediately
preceding the date of the notice of such conversion mailed to holders), equal to
115% of the Market Value Ratio of the CarMax Stock to the Circuit City Stock as
of the fifth Trading Day prior to the date of the notice of such conversion
mailed to such holders.
The Board of Directors may at any time convert each outstanding share of
Circuit City Stock into a number of fully paid and nonassessable shares of
CarMax Stock (or, if CarMax Stock is not Publicly Traded at such time and shares
of another class or series of common stock of the Company (other than Circuit
City Stock) are then Publicly Traded, of such other class or series of common
stock of the Company as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders), equal to 115% of the Market Value Ratio of the
Circuit City Stock to the CarMax Stock as of the fifth Trading Day prior to the
date of the notice of such conversion mailed to such holders.
The foregoing provisions allow the Company the flexibility to recapitalize
the Common Stock into one series of common stock that would, after such
recapitalization, represent an equity interest in all of the Company's
businesses. The optional exchange could be exercised at any future time if the
Board of Directors determined that, under the facts and circumstances then
existing, an equity structure consisting of two series of common stock was no
longer in the best interests of all of the Company's shareholders. Such exchange
may be exercised, however, at a time that is disadvantageous to the holders of
one of the series of Common Stock. See "Risk Factors -- Fiduciary Duties of the
Board of Directors; No Definitive Precedent under Virginia Law" and
" -- Potential Diverging Interests."
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
At any time at which all of the assets and liabilities attributed to the
CarMax Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of the Company (the "CarMax Group Subsidiaries"), the Board of
Directors may, provided that there are assets of the Company legally available
therefor, redeem all of the outstanding shares of CarMax Stock for a number of
shares of common stock of the CarMax Group Subsidiaries equal to the product of
the Outstanding CarMax Fraction multiplied by the number of shares of the CarMax
Group Subsidiaries to be outstanding immediately following such redemption, on a
pro rata basis. The Company will retain or distribute the balance of the
outstanding shares of the common stock of the CarMax Group Subsidiaries in
respect of the Inter-Group Interest of the Circuit City Group in the CarMax
Group, if any.
At any time at which all of the assets and liabilities attributed to the
Circuit City Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly owned
subsidiaries of the Company (the "Circuit City Group Subsidiaries"), the Board
of Directors may, provided that there are assets of the Company legally
available therefor, redeem all of the outstanding shares of Circuit City Stock
for all of the outstanding shares of the common stock of the Circuit City Group
Subsidiaries, on a pro rata basis. If at the time of any such redemption, the
Circuit City Group holds an Inter-Group Interest in the CarMax Group, the
Company will also issue a number of shares of CarMax Stock equal to the Number
of Shares Issuable with Respect to the Inter-Group Interest either to (i) the
holders of the Circuit City Stock or (ii) one or more of the Circuit City Group
Subsidiaries.
GENERAL CONVERSION AND REDEMPTION PROVISIONS
Not later than the 10th Trading Day following the consummation of a
Disposition referred to above under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company will announce publicly by press release
(i) the Net Proceeds of such Disposition, (ii) the number of shares outstanding
of the series of Common Stock relating to the Group subject to such Disposition,
(iii) the number of shares of such Common Stock into or for which Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof and (iv) in the case of a Disposition of the
properties and assets attributable to the CarMax Group, the Outstanding CarMax
Fraction on the date of such notice. Not earlier than the 26th Trading Day and
not later than the 30th Trading Day following the consummation of such
Disposition, the Company will announce publicly by press release which of the
actions specified in clause (1)(i), (1)(ii)(A), (1)(ii)(B) or (2) of the first
paragraph under " -- Mandatory Dividend, Redemption or Conversion of Common
Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend as described in clause (1)(i)
of such paragraph, the Company is required, not later than the 30th Trading Day
following the consummation of such Disposition, to cause to be given to each
holder of shares of the series of Common Stock relating to the Group subject to
such Disposition and to each holder of Convertible Securities convertible into
or exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for
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notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) the record
date for determining holders entitled to receive such dividend, which shall be
not earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition, (ii) the anticipated payment
date of such dividend (which will not be more than 85 Trading Days following the
consummation of such Disposition), (iii) the type of property to be paid as such
dividend in respect of outstanding shares of such Common Stock, (iv) the Net
Proceeds of such Disposition, (v) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax Fraction on
the date of such notice, (vi) the number of outstanding shares of such Common
Stock and the number of shares of such Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (vii) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive such dividend only if such holder properly converts, exchanges or
exercises them on or prior to the record date referred to in clause (i) of this
sentence. Such notice will be sent by first-class mail, postage prepaid, to each
such holder at such holder's address as the same appears on the transfer books
of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under
" -- Mandatory Dividend, Redemption or Conversion of Common Stock," the Company
is required, not less than 35 Trading Days and not more than 45 Trading Days
prior to the redemption date, to cause to be given to each holder of shares of
the series of Common Stock subject to the Disposition referred to in such
paragraph, and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities) a notice setting forth (1)
a statement that all shares of such Common Stock outstanding on the redemption
date will be redeemed, (2) the redemption date (which will not be more than 85
Trading Days following the consummation of such Disposition), (3) the type of
property in which the redemption price for the shares to be redeemed is to be
paid, (4) the Net Proceeds of such Disposition, (5) in the case of a Disposition
of the properties and assets attributed to the CarMax Group, the Outstanding
CarMax Fraction on the date of such notice, (6) the place or places where
certificates for shares of such Common Stock, properly endorsed or assigned for
transfer (unless the Company waives such requirement) are to be surrendered for
delivery of cash and/or securities or other property, (7) the number of
outstanding shares of such Common Stock and the number of shares of such series
of Common Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (8) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to participate in such redemption only
if such holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the redemption date referred to in clause (2) of this
sentence and a statement as to what, if anything, such holder will be entitled
to receive pursuant to the terms of such Convertible Securities or the Articles
as then amended if such holder thereafter converts, exchanges or exercises such
Convertible Securities and (9) a statement to the effect that, except as
otherwise provided below, dividends on such shares of such Common Stock shall
cease to be paid as of such redemption date. Such notice will be sent by
first-class mail, postage prepaid to each such holder at such holder's address
as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(B) of the first paragraph under
" -- Mandatory Dividend, Redemption or Conversion of Common Stock," the Company
is required, not later than the 30th Trading Day following consummation of the
Disposition referred to in such paragraph, to cause to be given to each holder
of shares of the series of Common Stock relating to the Group subject to such
Disposition and to each holder of Convertible Securities that are convertible
into or exchangeable or exercisable for shares of such Common Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a date, not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition
in respect of which such redemption is to be made, on which shares of such
series of Common Stock will be selected for redemption, (ii) the anticipated
redemption date which will not be more than 85 Trading Days following the
consummation of such Disposition, (iii) the type of property in which the
redemption price for the shares to be redeemed is to be paid, (iv) the Net
Proceeds of such Disposition, (v) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax Fraction, (vi)
the number of outstanding shares of such Common Stock and the number of shares
of such Common Stock into or for which outstanding Convertible Securities are
then convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (vii) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to participate in such selection for
redemption only if such holder properly converts, exchanges or exercises them on
or prior to the date referred to in clause (i) of this sentence and a statement
as to what, if anything, such holder will be entitled to receive pursuant to the
terms of such Convertible Securities or the Articles as then amended if such
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holder thereafter converts, exchanges or exercises such Convertible Securities
and (viii) a statement that the Company will not be required to register a
transfer of any shares of such series of Common Stock for a period of 15 Trading
Days next preceding the date referred to in clause (i) of this sentence.
Promptly, but not earlier than 40 Trading Days nor more than 50 Trading Days
following the consummation of such Disposition, the Company is required to cause
to be given to each holder of shares of such Common Stock to be so redeemed a
notice setting forth (1) the number of shares of such Common Stock held by such
holder to be redeemed, (2) a statement that such shares of such Common Stock
will be redeemed, (3) the redemption date, (4) the kind and per share amount of
cash and/or securities or other property to be received by such holder with
respect to each share of such Common Stock to be redeemed, including details as
to the calculation thereof, (5) the place or places where certificates for
shares of such Common Stock, properly endorsed or assigned for transfer (unless
the Company waives such requirement) are to be surrendered for delivery of such
cash and/or securities or other property, (6) if applicable, a statement to the
effect that the shares being redeemed may no longer be transferred on the
transfer books of the Company after the redemption date and (7) a statement to
the effect that, except as otherwise provided below, dividends on such shares of
such Common Stock will cease to be paid as of such redemption date. Such notices
will be sent by first-class mail, postage prepaid to each such holder, at such
holder's address as the same appears on the transfer books of the Company.
If less than all of the outstanding shares of such Common Stock are to be
redeemed as described above under
" -- Mandatory Dividend, Redemption or Conversion of Common Stock," such shares
will be redeemed by the Company pro rata among the holders of outstanding shares
of such Common Stock or by such other method as may be determined by the Board
of Directors to be equitable.
In the event of any conversion as described above under " -- Conversion of
Common Stock at Option of the Company" or " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company will cause to be given, not less than
35 Trading Days and not more than 45 Trading Days prior to the consummation
date, to each holder of shares of the series of Common Stock to be so converted
and to each holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities), a notice setting forth
(i) a statement that all outstanding shares of such Common Stock will be
converted, (ii) the conversion date (which, in the case of a conversion after a
Disposition, will not be more than 85 Trading Days following the consummation of
such Disposition), (iii) the per share number of shares of Circuit City Stock or
CarMax Stock or other class or series of common stock of the Company, as the
case may be, to be received with respect to each share of such Common Stock,
including details as to the calculation thereof, (iv) the place or places where
certificates for shares of such Common Stock, properly endorsed or assigned for
transfer (unless the Company waives such requirement) are to be surrendered for
delivery of certificates for shares of such Common Stock, (v) the number of
outstanding shares of such Common Stock and the number of shares of such Common
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (vi) a statement to the effect that, except as otherwise provided
below, dividends on such shares of such Common Stock will cease to be paid as of
such conversion date and (vii) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to receive shares of such Common Stock
upon such conversion only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the conversion date
referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Articles as then amended if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice will
be sent by first-class mail, postage prepaid, to such holder at such holder's
address as the same appears on the transfer books of the Company.
If the Company determines to redeem shares of a series of Common Stock as
described above under " -- Redemption in Exchange for Stock of Subsidiary," the
Company will cause to be given to each holder of shares of such Common Stock and
to each holder of Convertible Securities convertible into or exchangeable or
exercisable for shares of such Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) a statement
that all shares of such Common Stock outstanding on the redemption date will be
redeemed in exchange for shares of common stock of the Circuit City Group
Subsidiaries (and, in the case of a redemption to which clause (i) of the second
sentence of the second paragraph under " -- Redemption in Exchange for Stock of
a Subsidiary" applies, CarMax Stock) or shares of common stock of the CarMax
Group Subsidiaries, as the case may be, (ii) the redemption date, (iii) if
CarMax Stock is being redeemed, the Outstanding CarMax Fraction on the date of
such notice, (iv) the place or places where certificates for shares of such
Common Stock properly endorsed or assigned for
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transfer (unless the Company waives such requirement) are to be surrendered for
delivery of certificates for shares of common stock of the Circuit City Group
Subsidiaries (and, in the case of a redemption to which clause (i) of the second
sentence of the second paragraph under " -- Redemption in Exchange for Stock of
a Subsidiary" applies, CarMax Stock) or shares of common stock of the CarMax
Group Subsidiaries, as the case may be, (v) a statement to the effect that,
except as otherwise provided below, dividends on such shares of such Common
Stock will cease to be paid as of such redemption date, (vi) the outstanding
number of shares of such Common Stock and the number of shares of such Common
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (vii) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to receive shares of common stock of the Circuit
City Group Subsidiaries (and, in the case of a redemption to which clause (i) of
the second sentence of the first paragraph under " -- Redemption in Exchange for
Stock of a Subsidiary" applies, CarMax Stock) or shares of common stock of the
CarMax Group Subsidiaries, as the case may be, only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to the
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Articles of Amendment if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice will
be sent by first-class mail, postage prepaid, not less than 30 Trading Days nor
more than 45 Trading Days prior to the redemption date, to each such holder at
such holder's address as the same appears on the transfer books of the Company.
Neither the failure to mail any notice described above to any particular
holder of shares of any series of Common Stock or of any Convertible Securities
nor any defect therein will affect the sufficiency thereof with respect to any
other holder of outstanding shares of such Common Stock or of outstanding
Convertible Securities, or the validity of any such conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class or series of capital stock or any fractional securities to any holder
of either series of Common Stock upon any conversion, redemption, dividend or
other distribution described above. If more than one share of Common Stock is
held at the same time by the same holder, the Company may aggregate the number
of shares of any class or series of capital stock that is issuable or the amount
of securities or property that is distributable to such holder upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities). If the number of shares of any class or series of
capital stock or the amount of securities remaining to be issued or distributed
to any holder of such Common Stock is a fraction, the Company will, if such
fraction is not issued or distributed to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the Fair Value of such fraction
on the fifth Trading Day prior to the date such payment is to be made (without
interest).
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Common Stock; provided, however, that if such shares
are converted or redeemed by the Company after the record date for determining
holders of such Common Stock entitled to any dividend or distribution thereon,
such dividend or distribution will be payable to the holders of such shares at
the close of business on such record date notwithstanding such conversion or
redemption, in each case without interest.
Before any holder of Common Stock will be entitled to receive certificates
representing shares of any capital stock, cash and/or other securities or
property to be distributed to such holder with respect to any conversion or
redemption of shares of such Common Stock, such holder is required to surrender
at such place as the Company specified certificates for shares of such Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement). As soon as practicable after the Company's receipt of
certificates for such shares of such Common Stock, the Company will deliver to
the person for whose account such shares were so surrendered, or to the nominee
or nominees of such person, certificates representing the number of whole shares
of the kind of capital stock, cash and/or other securities or property to which
such person was entitled, together with any fractional payment referred to
above, in each case without interest. If less than all of the shares of Common
Stock represented by any one certificate are to be redeemed, the Company will
issue and deliver a new certificate for the shares of such Common Stock not
redeemed.
From and after any conversion or redemption of shares of either series of
Common Stock, all rights of a holder of shares of such Common Stock that were
converted or redeemed will cease, except for the right, upon surrender of the
certificates representing such shares of such Common Stock, to receive the cash
and/or the certificates representing shares of the kind and amount of capital
stock and/or other securities or property for which such shares were converted
or redeemed, together with any fractional payment or rights to dividends as
provided above, in each case without interest. No holder of a certificate that
immediately prior to the conversion or redemption of Common Stock represented
shares of such Common Stock will be entitled to receive any dividend or other
distribution or interest payment with respect to shares of any kind of capital
stock
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into or in exchange for which shares of such Common Stock were converted or
redeemed until surrender of such holder's certificate in exchange for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there will be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date occurring after the conversion, but which
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion, the
Company will, however, be entitled to treat the certificates for such Common
Stock that have not yet been surrendered for conversion as evidencing the
ownership of the number of whole shares of the kind of capital stock for which
the shares of such Common Stock represented by such certificates should have
been converted, notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of either series of Common Stock pursuant hereto. The Company will not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue or delivery of any shares of capital stock and/or
other securities in a name other than that in which the shares of such Common
Stock so converted or redeemed were registered, and no such issue or delivery
will be made unless and until the person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax had been paid.
VOTING RIGHTS
The holders of both series of Common Stock and any series of Preferred
Stock outstanding and entitled to vote together with the holders of Common Stock
will vote together as a single voting group on all matters as to which common
shareholders generally are entitled to vote other than a matter with respect to
which the Common Stock or either series thereof or any series of Preferred Stock
would be entitled to vote as a separate voting group. On all matters as to which
both series of Common Stock would vote together as a single voting group, (i)
each outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes (including a
fraction of one vote) equal to the quotient (rounded to the nearest three
decimal places), of (A) the sum of (1) four times the average Market Value of
the CarMax Stock over the five-Trading Day period ending on the 10th Trading Day
prior to the record date for determining the holders of Common Stock entitled to
vote, (2) three times the average Market Value of the CarMax Stock over the next
preceding five-Trading Day period, (3) two times the average Market Value of the
CarMax Stock over the next preceding five-Trading Day period and (4) the average
Market Value of the CarMax Stock over the next preceding five-Trading Day
period, divided by (B) the sum of (1) four times the average Market Value of the
Circuit City Stock over the five-Trading Day period ending on such 10th Trading
Day, (2) three times the average Market Value of the Circuit City Stock over the
next preceding five-Trading Day period, (3) two times the average Market Value
of the Circuit City Stock over the next preceding five-Trading Day period and
(4) the average Market Value of the Circuit City Stock over the next preceding
five-Trading Day period. If shares of only one series of Common Stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of Common Stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
To illustrate the foregoing, if the average Market Value of the CarMax
Stock for the periods specified in clause (A) above were $10, $20, $30 and $40,
respectively, and the average Market Value of the Circuit City Stock for the
periods specified in clause (B) above were $30, $40, $50 and $60, respectively,
each share of Circuit City Stock would have one vote and each share of CarMax
Stock would have 0.50 votes based on the following calculation:
(4x$10)+(3x$20)+(2x$30)+(1x$40)
------------------------------------
(4x$30)+(3x$40)+(2x$50)+(1x$60)
Based on such number of votes, on any proposal where both series of Common Stock
vote together as a single voting group (with no classes or series of Preferred
Stock, if any, entitled to vote together with the holders of Common Stock) and
assuming four times as many shares of Circuit City Stock as CarMax Stock are
issued and outstanding, the shares of Circuit City Stock and CarMax Stock would
represent approximately 89% and 11%, respectively, of the total voting power.
The Company anticipates that upon completion of the Offering, the Circuit
City Stock will initially represent a substantial majority of the voting power
of all shares of Common Stock entitled to vote in the election of directors.
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The Company will set forth the number of outstanding shares of CarMax Stock
and Circuit City Stock in its Annual and Quarterly Reports filed pursuant to the
Exchange Act, and will disclose in any proxy statement for a shareholder meeting
the number of outstanding shares and per share voting rights of the CarMax Stock
and the Circuit City Stock.
The relative voting rights of the Circuit City Stock and the CarMax Stock
could fluctuate as described above so that a holder's voting rights will more
closely reflect the Market Value of such holder's equity investment in the
Company. Fluctuations in the relative voting rights of the Circuit City Stock
and the CarMax Stock could influence an investor interested in acquiring and
maintaining a fixed percentage of the voting power of the Company to acquire
such percentage of both series of Common Stock, and would limit the ability of
investors in one series to acquire for the same consideration relatively more or
less votes per share than investors in the other series.
The holders of CarMax Stock and Circuit City Stock vote together as a
single voting group, except as to certain mergers and statutory share exchanges
and certain amendments to the Articles affecting, among other things, the
designation, rights, preferences or limitations of either series of Common
Stock, in which case a separate vote by the holders of the particular series
affected would also be required. Accordingly, if a separate vote on a matter by
the holders of either the CarMax Stock or Circuit City Stock is not required
under the VSCA and if the Board of Directors does not require a separate vote,
the series that is entitled to more than the number of votes required to approve
such matter will be in a position to control the outcome of the vote on such
matter even if the matter involved a divergence or the appearance of a
divergence of the interests between the holders of the CarMax Stock and the
Circuit City Stock. Conversely, if a separate vote of the holders of either
CarMax Stock or Circuit City Stock is required to approve, for example, a merger
of the type described above, the favorable vote of the holders of more than
two-thirds of the total number of votes entitled to be cast with respect to each
of the CarMax Stock and Circuit City Stock may be required for approval. In such
instance, the holders of either the CarMax Stock or Circuit City Stock could
prevent approval of such merger notwithstanding the fact that the holders of
more than two-thirds of the total number of votes entitled to be cast with
respect to both the CarMax Stock and Circuit City Stock had voted in favor of
it. Under the VSCA and the Articles, (i) approval of certain matters, such as a
merger, statutory share exchange, and certain amendments to the Articles,
requires the approval of the holders of more than two-thirds of the total number
of votes entitled to be cast thereon by each voting group; (ii) approval of any
other amendments to the Articles requires the approval of the holders of a
majority of the votes entitled to be cast thereon by each voting group; and
(iii) approval of most other matters (other than the election of directors who
are elected by a plurality of the votes cast) requires the votes cast in favor
of the matter to exceed the votes cast opposing the matter. See "Risk
Factors -- Factors Relating to the CarMax Stock -- Limited Separate Shareholder
Voting Rights; Effects on Voting Power."
The Amended Articles will reserve to the Board of Directors the right to
condition the submission of a particular matter on receipt of a separate vote of
the holders of outstanding shares of CarMax Stock or Circuit City Stock. The
Board of Directors has no present intention of imposing such a separate vote
requirement on any matter which it can now foresee. However, should the Board of
Directors, in the exercise of its fiduciary duties and its good faith judgment
of the best interests of the Company, conclude that such a separate vote is
necessary or desirable, it has reserved the right to so require.
LIQUIDATION
In the event of a liquidation, dissolution or termination of the Company,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Company and full preferential amounts
(including any accumulated and unpaid dividends) to which holders of any series
of Preferred Stock are entitled (regardless of the Group to which such shares of
Preferred Stock were attributed), the holders of CarMax Stock and Circuit City
Stock will be entitled to receive the net assets, if any, of the Company
remaining for distribution to holders of Common Stock on a per share basis in
proportion to the Liquidation Units per share of each series. Each share of
CarMax Stock will have .5 of a Liquidation Unit and each share of Circuit City
Stock will have one Liquidation Unit. Thus, the liquidation rights of the
holders of the respective series may not bear any relationship to the relative
market values or the relative voting rights of the two series.
The Liquidation Units of the CarMax Stock and the Circuit City Stock were
determined by the Company in consultation with its financial advisors and are
based upon, among other factors, each Group's initial level of debt and equity
capitalization, each Group's recent historical financial performance, the market
prices of shares of comparable companies that are publicly traded and the
current state of the markets for public offerings and other stock transactions.
See "Risk Factors -- Factors Relating to the CarMax Stock -- Absence of Prior
Market for CarMax Stock; Possible Volatility of Stock Price." The Company
considers that its complete liquidation is a remote contingency, and its
financial advisors believe that, in general, these liquidation provisions are
immaterial to trading in CarMax Stock and Circuit City Stock. No holders of
CarMax Stock will have any special right to receive specific assets attributable
to the CarMax Group and no holder of Circuit City Stock
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will have any special right to receive specific assets attributable to the
Circuit City Group in the case of a liquidation, dissolution or termination of
the Company.
If the Company subdivides (by stock split, reclassification or otherwise)
or combines (by reverse stock split or otherwise) the outstanding shares of
either CarMax Stock or Circuit City Stock or declares a dividend or other
distribution of shares of CarMax Stock or Circuit City Stock to holders of such
series of Common Stock, the number of Liquidation Units of the CarMax Stock or
the number of Liquidation Units of the Circuit City Stock, will be appropriately
adjusted as determined by the Board of Directors so as to avoid any dilution in
aggregate liquidation rights of any series of Common Stock. For example, in case
the Company were to effect a two-for-one split of the Circuit City Stock, an
adjustment would be made so that either the Circuit City Stock would be entitled
to 0.5 of a Liquidation Unit per share or the CarMax Stock would be entitled to
one Liquidation Unit per share, as determined by the Board of Directors, in
order to avoid dilution in the aggregate liquidation rights of holders of CarMax
Stock.
Neither a merger nor share exchange of the Company into or with any other
corporation, nor a merger or share exchange of any other corporation into or
with the Company, nor any sale, lease, exchange or other disposition of all or
any part of the assets of the Company, will, alone, be deemed to be a
liquidation of the Company, or cause the dissolution of the Company, for
purposes of the liquidation provisions set forth above.
DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made in good faith by the Board of Directors under any
provision described above and any determinations with respect to any Group or
the rights of holders of shares of either series of Common Stock, would be final
and binding on all shareholders of the Company, subject to the rights of
shareholders under applicable Virginia law and under the federal securities
laws.
PREEMPTIVE RIGHTS
Neither the holders of the CarMax Stock nor the holders of the Circuit City
Stock will have any preemptive rights or any rights to convert their shares into
any other securities of the Company.
INTER-GROUP INTEREST
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would initially represent 100% of the
equity value of the CarMax Group. Such number was determined based on the
historical and projected financial and operating information of the CarMax
Group, the market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the CarMax
Group, prevailing equity market conditions and the desired range of the initial
public offering price of the CarMax Stock. The number of shares of CarMax Stock
representing 100% of the equity value of the CarMax Group will increase as a
result of the Offering to the extent of the shares issued for the account of the
CarMax Group. For example, if 20% of the equity value of the CarMax Group is
issued in the Offering, the 18,860,000 shares representing such percentage and
issued to the public would cause the number of shares representing 100% of the
equity value of the CarMax Group to increase to 94,300,000 without giving effect
to the CarMax Stock Options.
The 18,860,000 shares of CarMax Stock to be issued in the Offering will be
issued for the account of the CarMax Group. As a result, immediately after the
Offering, the Outstanding CarMax Fraction will equal 20% and the Inter-Group
Interest Fraction will equal 80%, without giving effect to the CarMax Stock
Options. If the Underwriters exercise their over-allotment option, the number of
shares subject to such option also will be issued for the account of the CarMax
Group. If the over-allotment option is exercised in full, the Outstanding CarMax
Fraction will equal 22.3% and the Inter-Group Interest Fraction will equal
77.7%, without giving effect to the CarMax Stock Options.
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group. The sum of the
Inter-Group Interest Fraction and the Outstanding CarMax Fraction will always
equal 100%. The "Number of Shares Issuable with Respect to the Inter-Group
Interest" means the number of shares of CarMax Stock that could be sold or
otherwise issued by the Company for the account of the Circuit City Group in
respect of the Inter-Group Interest. The Inter-Group Interest would not be
represented by actual shares of CarMax Stock and could not be voted by the
Circuit City Group.
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At the time of any additional sale of CarMax Stock, the Board of Directors
would, in its sole discretion, determine the allocation of the net proceeds of
such sale between the CarMax Group and the Circuit City Group. The Board of
Directors could allocate 100% of the net proceeds of a sale of CarMax Stock to
the CarMax Group or to the Circuit City Group, in which event the net proceeds
would be reflected entirely in the financial statements of the Group to which
such proceeds would be allocated. If the net proceeds of any sale of CarMax
Stock were allocated to the Circuit City Group in respect of its Inter-Group
Interest, the Number of Shares Issuable with Respect to the Inter-Group Interest
would be reduced, the Inter-Group Interest Fraction would accordingly also be
reduced and the Outstanding Interest Fraction would be proportionately
increased. If the net proceeds of any sale of CarMax Stock were allocated to the
CarMax Group, the Number of Shares Issuable with Respect to the Inter-Group
Interest would not be reduced, but the Inter-Group Interest Fraction would
nonetheless be reduced, and the Outstanding Interest Fraction would increase
accordingly.
The Board of Directors reserves the right to issue shares of CarMax Stock
as a distribution on the Circuit City Stock, although it has no current
intention to do so. Such a distribution would be treated as a distribution of
shares issuable with respect to the Inter-Group Interest and, as a result, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease by the number of shares distributed to the holders of Circuit City
Stock, resulting in a reduction in the Inter-Group Interest Fraction and a
proportionate increase in the Outstanding CarMax Fraction.
If the Company repurchases shares of CarMax Stock with cash or property of
the Circuit City Group, the Number of Shares Issuable with Respect to the
Inter-Group Interest and the Inter-Group Interest Fraction would increase and
the Outstanding CarMax Fraction would decrease accordingly. If the repurchase of
shares of CarMax Stock were attributed to the CarMax Group, the Number of Shares
Issuable with Respect to the Inter-Group Interest would not change but the
Inter-Group Interest Fraction would nonetheless increase and the Outstanding
CarMax Fraction would decrease accordingly.
The foregoing determinations with respect to the allocation of issuances of
shares of CarMax Stock between the Groups and the choice of which Group's funds
are to be used to repurchase shares of CarMax Stock will be made by the Board of
Directors, in its discretion, after consideration of a number of factors,
including, among others, the relative levels of internally generated cash flow
of each Group, the long-term business prospects for each Group and the
availability and cost of alternative financing sources.
Cash or other property allocated to the Circuit City Group that is
contributed as additional equity to the CarMax Group would increase the Number
of Shares Issuable with Respect to the Inter-Group Interest (based on the then
current Market Value of shares of CarMax Stock), and, accordingly, would
increase the Inter-Group Interest Fraction and decrease the Outstanding CarMax
Fraction. Cash or other property allocated to the CarMax Group that is
transferred to the Circuit City Group would, if so determined by the Board of
Directors, decrease the Number of Shares Issuable with Respect to the
Inter-Group Interest (based on the then current Market Value of shares of CarMax
Stock) and, accordingly, would decrease the Inter-Group Interest Fraction and
increase the Outstanding CarMax Fraction. The Board of Directors could
determine, in its sole discretion, to make such contribution or transfer after
consideration of a number of factors, including, among others, the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
The financial statements of the Circuit City Group will be credited, and
the financial statements of the CarMax Group will be charged with, an amount
equal to the product of (i) the Fair Value of any dividend, redemption payment
or other distribution paid or distributed in respect of the outstanding shares
of CarMax Stock (including any dividend of, or redemption payment made with, Net
Proceeds from a Disposition), times (ii) a fraction, the numerator of which is
the Inter-Group Interest Fraction on the record date for such dividend,
redemption payment or distribution and the denominator of which is the
Outstanding CarMax Fraction on the record date for such dividend, redemption
payment or distribution.
"Number of Shares Issuable with Respect to the Inter-Group Interest" means
the number of shares determined by the Board of Directors prior to the first
issuance of shares of CarMax Stock to be the number of shares of CarMax Stock
that initially represents 100% of the common shareholders' equity of the Company
attributable to the CarMax Group (which determination will be set forth in a
statement filed with the records of the actions of the Board of Directors)
provided, however, that such number shall from time to time thereafter be:
(i) adjusted, if before such adjustment such number is greater than
zero, as determined by the Board of Directors to be appropriate to reflect
equitably any subdivision (by stock split or otherwise) or combination (by
reverse stock split or otherwise) of the CarMax Stock or any dividend or
other distribution of shares of CarMax Stock to holders of shares of CarMax
Stock or any reclassification of CarMax Stock;
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(ii) decreased (but to not less than zero), if before such adjustment
such number is greater than zero, by action of the Board of Directors by
(1) the number of shares of CarMax Stock issued or sold by the Company
that, immediately prior to such issuance or sale, were included in the
Number of Shares Issuable with Respect to the Inter-Group Interest, (2) the
number of shares of CarMax Stock issued upon conversion, exchange or
exercise of Convertible Securities that, immediately prior to the issuance
or sale of such Convertible Securities, were included in the Number of
Shares Issuable with Respect to the Inter-Group Interest, (3) the number of
shares of CarMax Stock issued by the Corporation as a dividend or other
distribution (including in connection with any reclassification or exchange
of shares) to holders of Circuit City Stock, (4) the number of shares of
CarMax Stock issued upon the conversion, exchange or exercise of any
Convertible Securities issued by the Company as a dividend or other
distribution (including in connection with any reclassification or exchange
of shares) to holders of Circuit City Stock or (5) the number (rounded, if
necessary, to the nearest whole number) equal to the quotient of (a) the
aggregate Fair Value as of the date of contribution of properties or assets
(including cash) transferred from the CarMax Group to the Circuit City
Group in consideration for a reduction in the Number of Shares Issuable
with Respect to the Inter-Group Interest divided by (b) the Market Value of
one share of CarMax Stock as of the date of such transfer; and
(iii) increased by (1) the number of outstanding shares of CarMax
Stock repurchased by the Company for consideration that is attributed as
contemplated by the definition of "Circuit City Group" set forth above to
the Circuit City Group and (2) the number (rounded, if necessary, to the
nearest whole number) equal to the quotient of (a) the Fair Value of
properties or assets (including cash) therefore attributed as contemplated
by the definition of "Circuit City Group" set forth above to the Circuit
City Group that are contributed to the CarMax Group in consideration of an
increase in the Number of Shares Issuable with Respect to the Inter-Group
Interest, divided by (b) the Market Value of one share of CarMax Stock as
of the date of such contribution.
For further discussion of, and illustrations of the calculation of the
Inter-Group Interest Fraction, the Outstanding CarMax Fraction and the Number of
Shares Issuable with Respect to the Inter-Group Interest and the effects thereon
of dividends on, and issuances and repurchase of, shares of CarMax Stock, and
transfers of cash or other property between Groups, see Annex I hereto.
RESTATED RIGHTS AGREEMENT
The Company has issued preferred stock purchase rights (the "Original
Rights") to all holders of the Company's existing common stock pursuant to a
Rights Agreement dated April 29, 1988 between the Company and Crestar Bank, as
Rights Agent, as amended and restated as of March 5, 1996 (the "Rights
Agreement"). Prior to the issuance of any shares of CarMax Stock in the
Offering, (i) the Rights Agreement will be amended and restated (the "Restated
Rights Agreement") to reflect the change in the capital structure of the
Company, (ii) the Articles will be amended by action of the Board of Directors
to establish a new series of Preferred Stock (the "Series F Preferred Stock"),
(iii) the Board of Directors will authorize the issuance of one preferred stock
purchase right (a "CarMax Right") with respect to each share of CarMax Stock
that might be issued from time to time, including each such share issued
pursuant to the Offering, and each Original Right will be redesignated as a
"Circuit City Right." The CarMax Rights and the Circuit City Rights are
collectively referred to herein as the "Rights."
The Restated Rights Agreement will provide that, prior to the earlier of
(i) the 10th day (the "Ownership Trigger Date") after a public announcement that
a person or group (including any affiliate or associate of such person or group)
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of shares of Common Stock representing 15% or more of the
total number of votes entitled to be cast generally in the election of directors
of all outstanding shares of Common Stock or (ii) the 10th business day after
the date of the commencement of or first public announcement of the intent of
any person or group to commence a tender or exchange offer the consummation of
which would result in such person or group becoming an Acquiring Person (the
earlier of such dates being called the "Distribution Date"), the CarMax Rights
and the Circuit City Rights will be evidenced by the certificates representing
shares of CarMax Stock and Circuit City Stock, respectively, then outstanding,
and no separate Rights certificates will be distributed. Therefore, until the
Distribution Date, the CarMax Rights will be transferred with and only with the
CarMax Stock, and the Circuit City Rights will be transferred with and only with
the Circuit City Stock. For purposes of the Restated Rights Agreement, the total
voting rights of the Common Stock will be determined based upon the fixed voting
rights of holders of outstanding shares of CarMax Stock and Circuit City Stock
in effect at the time of any such determination. See " -- Voting Rights."
Upon the close of business on the Distribution Date, the Rights will
separate from the Common Stock and become exercisable as described below. The
Rights will expire on April 29, 1998 (the "Expiration Date"), unless earlier
redeemed by the Company as described below.
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Following the Distribution Date, registered holders of Rights will be
entitled to purchase from the Company (i) in the case of a CarMax Right, one
four-hundredth (1/400th) of a share of Series F Preferred Stock at a purchase
price of $22, subject to adjustment (the "Series F Purchase Price"), and (ii) in
the case of a Circuit City Right, one four-hundredth (1/400th) of a share of
Series E Preferred Stock at a purchase price of $35, subject to adjustment (the
"Series E Purchase Price").
In the event (i) any person or group becomes an Acquiring Person other than
pursuant to a cash tender offer for all outstanding shares of Common Stock which
is determined to be fair by the Continuing Directors (i.e., those directors who
are such on the Distribution Date or are elected or nominated by a majority of
the Continuing Directors in office on the date of such election or nomination),
(ii) an Acquiring Person engages in one or more "self-dealing" transactions with
the Company as set forth in the Restated Rights Agreement, (iii) the Company is
the surviving or continuing corporation in a merger or other combination with an
Acquiring Person and all the Common Stock remains outstanding and is not changed
or exchanged or (iv) while there is an Acquiring Person, there shall be any
reclassification of securities, recapitalization of the Company or other
transaction or series of transactions that has the effect of increasing by more
than 1% the proportionate share of the outstanding shares of any class or series
of equity securities of the Company beneficially owned by the Acquiring Person,
then the Rights would "flip-in," and proper provision would be made so that each
holder of a Right, other than Rights which are, or under certain circumstances
specified in the Restated Rights Agreement, were beneficially owned by any
Acquiring Person (which will thereafter be void), will thereafter (a) in the
case of a CarMax Right, entitle its holder to purchase, at the Series F Purchase
Price, a number of shares of CarMax Stock with a market value equal to twice the
Series F Purchase Price and (b) in the case of a Circuit City Right, entitle its
holder to purchase, at the Series E Purchase Price, a number of shares of
Circuit City Stock with a market value equal to twice the Series E Purchase
Price.
In the event, following the announcement that a person or group has become
an Acquiring Person, (i) the Company engages in a merger or consolidation with
another entity in which the Company is not the surviving corporation or in which
any shares of the outstanding Common Stock are changed into or exchanged for
stock or other securities of another person (or the Company) or cash or other
property or (ii) 50% or more of the Company's consolidated assets or earning
power are sold, the Rights would "flip-over," and each CarMax Right and each
Circuit City Right will entitle its holder to purchase, for the Series F
Purchase Price and Series E Purchase Price, respectively, a number of shares of
common stock of such entity or purchaser with a market value equal to twice the
applicable Purchase Price.
After any person or group becomes an Acquiring Person and before any
Acquiring Person becomes the beneficial owner of shares of Common Stock
representing 50% or more of the total number of votes entitled to be cast
generally in the election of directors of all outstanding shares of Common
Stock, the Company may, with the approval of a majority of the Continuing
Directors, exchange all or part of the CarMax Rights and Circuit City Rights for
shares of CarMax Stock or Circuit City Stock, respectively, or for shares of
Series F Preferred Stock or Series E Preferred Stock (or other preferred shares
having the same rights, privileges and preferences), respectively. In such
event, the exchange ratio would be one share of the applicable Common Stock, or
one four-hundredth (1/400th) of a share of the applicable series of Preferred
Stock, per Right.
At any time prior to the earlier of the Ownership Trigger Date or the
Expiration Date, the Company may, at its option, redeem all but not less than
all of the then outstanding Rights at a redemption price of $.0025 per Right
(the "Redemption Price"), provided, however, that any authorization of
redemption will require the concurrence of a majority of the Continuing
Directors if (i) any person or group has become an Acquiring Person or (ii)
there has been a change in a majority of the directors resulting from a proxy or
consent solicitation if any person participating in such solicitation has stated
(or the Board of Directors has determined in good faith) that such person
intends to take, or may consider taking, any action that would result in such
person becoming an Acquiring Person or that would cause the Rights to "flip-in"
or "flip-over." Immediately upon the action of the Board of Directors ordering
the redemption of the Rights, the Rights will terminate and the only right
thereafter of the holders of the Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
At any time prior to the Distribution Date, the Company may, without the
approval of any holders of Rights, supplement or amend any provision of the
Restated Rights Agreement, except that no supplement or amendment may be made
that changes the Redemption Price, the Expiration Date, the Purchase Prices or
the number of one four-hundredths of a share of Preferred Stock for which a
Right is exercisable (such provisions being referred to herein collectively as
the "Principal Economic Terms"). From and after the Distribution Date, the
Company may, without the approval of any holders of Rights, supplement or amend
the Restated Rights Agreement (i) to cure any ambiguity, (ii) to correct or
supplement any provision
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that may be defective or inconsistent, (iii) subject to certain limitations and,
in certain circumstances, only with the concurrence of a majority of the
Continuing Directors, to shorten or lengthen any time period under the Restated
Rights Agreement (other than a time period relating to when the Rights may be
redeemed if at the time of such supplement or amendment the Rights are not then
redeemable), or (iii) in any manner that the Company may deem necessary or
desirable and which does not adversely affect the interests of the holders of
Rights (other than an Acquiring Person) and which does not change the Principal
Economic Terms.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit B-2 the Form of Rights Certificate for CarMax Rights) has been filed
with the Commission as an Exhibit to the Registration Statement of which this
Prospectus is a part. A copy of the Rights Agreement previously has been filed
with the Commission as an Exhibit to a Registration Statement on Form 8-A, and
is incorporated herein by reference. A copy of the form of the Restated Rights
Agreement is available free of charge from the Company. This summary description
of the CarMax Rights does not purport to be complete and is qualified in its
entirety by reference to the form of the Restated Rights Agreement.
ANTI-TAKEOVER CONSIDERATIONS
The following information is provided with respect to certain matters that
could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
The Articles currently provide for the issuance of Preferred Stock in
series at the discretion of the Board of Directors without further action by the
Company's shareholders (except as may be required by Virginia law or the rules
or regulations of any securities exchange on which the Company's securities may
then be listed). The Board of Directors may designate any of such series of
Preferred Stock and may establish the relative rights and preferences of each
series; however, no series of Preferred Stock may entitle the holder thereof to
more than one vote per share. The Articles authorize 2,000,000 shares of
Preferred Stock of which 1,000,000 shares have been or will be designated as
Series E or Series F Preferred Stock and 800,000 of those are or will be
reserved for issuance in connection with the Company's Restated Rights
Agreement. One of the effects of the existence of authorized, unissued and
unreserved Preferred Stock could be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company. The Articles also provide for a classified Board of Directors under
which approximately one-third of the total number of directors are elected each
year. In addition, pursuant to the Bylaws, only the Chairman, the President or
the Board of Directors, and not the shareholders of the Company, are permitted
to call a special meeting of shareholders.
Certain of the Company's financing arrangements include provisions allowing
for the termination of such arrangements and the acceleration of the borrowings
and other obligations thereunder in the event (i) any person or group becomes,
or acquires the right to become, the beneficial owner of securities of the
Company representing 50% or more of the combined voting power of the Company's
outstanding voting securities or (ii) a transaction or series of transactions
occurs as a result of which the directors immediately prior to such
transaction(s) (together with persons elected or nominated by not less than two-
thirds of such directors) cease to constitute a majority of the Board of
Directors.
The Restated Rights Agreement will permit disinterested shareholders to
acquire additional shares of the Company or of an acquiring company at a
substantial discount in the event of certain described changes in control. See
" -- Restated Rights Agreement."
The Company is subject to the "affiliated transactions" and "control share
acquisitions" statutes of the VSCA, which are summarized below.
The "affiliated transactions" statute restricts certain transactions
("Affiliated Transactions") between a Virginia corporation having more than 300
shareholders of record and any person (an "Interested Shareholder") who
beneficially owns more than 10% of any class of the corporation's voting
securities. These restrictions, which are described below, do not apply to an
Affiliated Transaction with an Interested Shareholder who has been such
continuously since the date the corporation first had 300 shareholders of record
or whose acquisition of shares making such person an Interested Shareholder was
previously approved by a majority of the corporation's Disinterested Directors.
"Disinterested Director" means, with respect to a particular Interested
Shareholder, a member of the corporation's board of directors who was (i) a
member on the date on which an Interested Shareholder became an Interested
Shareholder or (ii) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Disinterested
Directors then on the Board of Directors. Affiliated
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Transactions include mergers, share exchanges, material dispositions of
corporate assets not in the ordinary course of business, any dissolution of the
corporation proposed by or on behalf of an Interested Shareholder, or any
reclassification, including reverse stock splits, recapitalization or merger of
the corporation with its subsidiaries, which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%. The
"affiliated transactions" statute prohibits a corporation from engaging in an
Affiliated Transaction with an Interested Shareholder for a period of three
years after the Interested Shareholder became such unless the transaction is
approved by the affirmative vote of a majority of the Disinterested Directors
and by the affirmative vote of the holders of two-thirds of the voting shares
other than those shares beneficially owned by the Interested Shareholder.
Following the three-year period, in addition to any other vote required by law
or by the corporation's articles of incorporation, an Affiliated Transaction
must be approved either by a majority of the Disinterested Directors or by the
shareholder vote described in the preceding sentence unless the transaction
satisfies the fair-price or certain other provisions of the statute. These fair
price provisions require, in general, that the consideration to be received by
shareholders in the Affiliated Transaction (a) be in cash or in the form of
consideration used by the Interested Shareholder to acquire the largest number
of its shares and (b) not be less, on a per share basis, than an amount
determined in the manner specified in the statute by reference to the highest
price paid by the Interested Shareholder for shares it acquired and the fair
market value of the shares on specified dates.
The "control share acquisitions" statute provides that shares of a Virginia
corporation having 300 or more shareholders of record which are acquired in a
"Control Share Acquisition" have no voting rights unless such rights are granted
by a shareholders' resolution approved by the holders of a majority of the votes
entitled to be cast on the election of directors by persons other than the
acquiring person or any officer or employee-director of the corporation. A
"Control Share Acquisition" is an acquisition of voting shares which, when added
to all other voting shares beneficially owned by the acquiring person, would
cause such person's voting strength with respect to the election of directors to
meet or exceed any of the following thresholds: (i) one-fifth, (ii) one-third or
(iii) a majority. An acquiring person is entitled, before or after a Control
Share Acquisition, to file a disclosure statement with the corporation and
demand a special meeting of shareholders to be called for the purpose of
considering whether to grant voting rights for the shares acquired or proposed
to be acquired. If authorized in the corporation's articles of incorporation or
bylaws before a Control Share Acquisition has occurred, the corporation may,
during specified periods, redeem the shares so acquired if no disclosure
statement is filed or if the shareholders have failed to grant voting rights to
such shares. In the event full voting rights are granted to an acquiring person
who then has majority voting power, those shareholders who did not vote in favor
of such grant are entitled to dissent and demand payment of the fair value of
their shares from the corporation. The control share acquisitions statute does
not apply to an actual or proposed Control Share Acquisition if the
corporation's articles of incorporation or bylaws are amended, within the time
limits specified in the statute, to so provide.
The Company's Bylaws establish advance notice procedures, as described
below, for shareholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of shareholders of
the Company.
The Bylaws provide that nominations for the election of directors may be
made only by the Board of Directors or by a shareholder entitled to vote in the
election of directors who gives timely written notice to the Secretary of the
Company. Any such notice must be given not later than (i) with respect to an
election to be held at an annual meeting of shareholders, 120 days in advance of
such meeting or (ii) with respect to a special meeting of shareholders for the
election of directors, the close of business on the seventh day following the
date on which notice of such meeting is first given to shareholders. The
shareholder's notice must set forth (a) the name and address of the shareholder
who intends to make the nomination and of the person(s) to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person(s) specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Company if so elected.
The Bylaws also provide that in order to bring before an annual meeting of
shareholders any proper business that a shareholder has not sought to have
included in the Company's proxy statement for the meeting, a shareholder must
give timely written notice to the Secretary or Assistant Secretary of the
Company at the Company's principal office. Any such notice must be received (i)
on or after March 1st and before April 1st of the year in which the meeting will
be held, if clause (ii) is not applicable, or (ii) not less than 60 days before
the date of the meeting if the date for such meeting prescribed in the Bylaws
has been changed by more than 30 days. The shareholder's notice must set forth
(a) the name and address, as they
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appear on the Company's stock transfer books, of the shareholder, (b) the class
and number of shares of stock of the Company beneficially owned by the
shareholder, (c) a representation that the shareholder is a shareholder of
record at the time of the giving of the notice and intends to appear in person
or by proxy at the meeting to present the business specified in the notice, (d)
a brief description of the business desired to be brought before the meeting,
including the complete text of any resolutions to be presented and the reasons
for wanting to conduct such business and (e) any interest that the shareholder
may have in such business.
Certain provisions described above may have the effect of delaying
shareholder actions with respect to certain business combinations and the
election of new members of the Board of Directors. As such, the provisions could
have the effect of discouraging open market purchases of Common Stock because
they may be considered disadvantageous by a shareholder who desires to
participate in a business combination or elect a new director.
STOCK TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. acts as the registrar and transfer agent for
both the CarMax Stock and the Circuit City Stock.
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CERTAIN UNITED STATES TAX CONSEQUENCES
The following is a discussion of certain of the material United States
federal income tax consequences of the ownership and disposition of the CarMax
Stock, including certain anticipated United States income and estate tax
consequences of the ownership and disposition of the CarMax Stock applicable to
Non-United States Holders of such CarMax Stock. For the purpose of this
discussion, a "Non-United States Holder" is any corporation, individual,
partnership, estate or trust that is, as to the United States, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
non-resident fiduciary of a foreign estate or trust as such terms are defined in
the Internal Revenue Code of 1986, as amended (the "Code"). This discussion does
not deal with all aspects of United States income and estate taxation and does
not deal with foreign, state and local tax consequences that may be relevant to
Non-United States Holders in light of their personal circumstances. Furthermore,
the following discussion is based on current provisions of the Code and
administrative and judicial interpretations as of the date hereof, all of which
are subject to change. Prospective investors are urged to consult their tax
advisors regarding the United States federal, state, local and non-United States
income and other tax consequences of owning and disposing of CarMax Stock.
GENERAL
In the opinion of McGuire, Woods, Battle & Boothe, L.L.P., tax counsel to
the Company, the CarMax Stock will be treated for federal income tax purposes as
common stock of the Company. Accordingly, for federal income tax purposes, (i)
the Company will not recognize any income, gain or loss as a result of the
Offering and sale of the CarMax Stock; (ii) a holder of CarMax Stock will not
recognize any income, gain or loss upon the exchange of CarMax Stock for Circuit
City Stock, either pursuant to the Company's option or upon the Disposition of
all or substantially all of the assets of the CarMax Group, except for cash
received in lieu of fractional shares; and (iii) the tax basis of Circuit City
Stock received in such exchange will be the tax basis of the CarMax Stock
exchanged therefor, and, assuming that the CarMax Stock is held as a capital
asset, the holding period of such Circuit City Stock will include the holding
period of such CarMax Stock.
The U.S. Internal Revenue Service (the "Service") has announced that it
will not issue advance rulings on the classification of an instrument that has
certain voting and liquidation rights in an issuing corporation but whose
dividend rights are determined by reference to the earnings of a segregated
portion of the issuing corporation's assets, including assets held by a
subsidiary. In addition, there are no court decisions or other authorities that
bear directly on transactions similar to the Offering. It is possible,
therefore, that the Service could assert that the CarMax Stock represents
property other than stock of the Company. If the CarMax Stock were treated as
property other than stock of the Company, the Company or its subsidiaries (i)
could recognize a significant taxable gain on the sale of the CarMax Stock in an
amount equal to the excess of the fair market value of such stock sold over its
federal income tax basis to the Company or such subsidiaries and (ii) the
Company could lose its ability to file consolidated federal income tax returns
with the CarMax Group (one consequence being that any dividends paid or deemed
to be paid by the CarMax Group to the Company would be taxable to the Company,
subject to any applicable dividends received deduction). As indicated above,
however, it is the opinion of counsel that the Service would not prevail in any
such assertion.
The foregoing discussion is for general information only. It is based on
the Code, as amended to the date hereof, United States Treasury Department
regulations, published positions of the Service and court decisions now in
effect, all of which are subject to change. In particular, Congress could enact
legislation affecting the treatment of stock with characteristics similar to the
CarMax Stock or the United States Treasury Department could change the current
law in future regulations, including regulations issued pursuant to its
authority under Section 337(d) of the Code. Any future legislation or
regulations could apply retroactively.
TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
DIVIDENDS
Generally, any dividend paid to a Non-United States Holder of CarMax Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or at a lesser applicable treaty rate. Under
current United States Treasury regulations, dividends paid to an address outside
the United States are presumed to be paid to a resident of such country for
purposes of the withholding discussed above, and under the current
interpretation of United States Treasury regulations, for purposes of
determining applicability of a tax treaty rate. The United States Treasury
Department has issued proposed regulations that, if finalized, would require a
Non-United States Holder of CarMax Stock seeking to claim the benefit of an
applicable treaty rate (and to avoid backup withholding, as discussed below) to
satisfy applicable certification and other requirements.
78
<PAGE>
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from such withholding tax. However, such effectively
connected dividends, net of certain deductions and credits, are taxed at the
same graduated rates applicable to United States persons. A Non-United States
Holder may claim exemption from withholding under the effectively connected
income exception by filing Form 4224 (Statement Claiming Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of Business
in the United States) with the Company or its paying agent.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may be
subject to a branch profits tax at a rate of 30% or at a lesser applicable
treaty rate.
A Non-United States Holder of CarMax Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Service.
DISPOSITION OF CARMAX STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his CarMax Stock unless (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder, (ii) the Non-United
States Holder is an individual who is present in the United States for a period
or periods aggregating 183 days or more during the calendar year in which such
sale or disposition occurs and certain other conditions are met or (iii) the
Company is or has been a "United States real property holding corporation" for
federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such holder's holding period.
The Company has determined that it is not, and does not believe that it
will become, a "United States real property holding corporation" for federal
income tax purposes. If the Company were to become a "United States real
property holding corporation," a Non-United States Holder who actually or
constructively owned (during the five-year period preceding such disposition)
more than 5% of the CarMax Stock would be subject to federal income tax on any
gain from the sale or other disposition of such Stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of dividends to a Non-United States Holder at an address outside
the United States generally will not be subject to backup withholding and
information reporting. Dividends paid to a Non-United States Holder at an
address within the United States may be subject to backup withholding at a rate
of 31% if the Non-United States Holder fails to establish that it is entitled to
an exemption or to provide a correct taxpayer identification number and other
information to the payor. Generally, the Company must report to the Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Service may make its reports available to tax
authorities in the recipient's country of residence.
The payment of the proceeds of the disposition of CarMax Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a Non-United States
Holder of CarMax Stock to or through a foreign office of a broker will not be
subject to backup withholding. However, information reporting requirements (but
no backup withholding) will apply to a payment of disposition proceeds outside
the United States through an office outside the United States of a broker that
is (a) a United States person, (b) a United States controller foreign
corporation or (c) a foreign person 50% or more of whose gross income for
certain periods is from a United States trade or business unless such broker has
documentary evidence in its files of the owner's foreign status and has no
actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the Service.
ESTATE TAX
A nonresident alien individual who owns CarMax Stock at the time of his
death or has made certain lifetime transfers of an interest in CarMax Stock will
be required to include the value of such stock in his gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
79
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting
Agreement, dated the date of this Prospectus (the "Underwriting Agreement"), the
Company has agreed to sell 18,860,000 shares of CarMax Stock, and the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Wheat, First Securities, Inc. are serving as U.S.
Representatives, have severally agreed to purchase, and the International
Underwriters named below, for whom Morgan Stanley & Co. International Limited,
Goldman Sachs International and Wheat, First Securities, Inc. are serving as
International Representatives, have severally agreed to purchase, the respective
number of shares of CarMax Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................
Goldman, Sachs & Co................................................
Wheat, First Securities, Inc.......................................
----------
Subtotal........................................................ 15,088,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.........................
Goldman Sachs International........................................
Wheat, First Securities, Inc.......................................
----------
Subtotal........................................................ 3,772,000
----------
Total......................................................... 18,860,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of CarMax Stock offered hereby are subject to the approval of certain
legal matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all the shares of CarMax Stock offered hereby
(other than those covered by the over-allotment option described below) if any
such shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (a)
it is not purchasing any U.S. Shares (as defined below) being sold by it for the
account of anyone other than a United States or Canadian Person (as defined
below); and (b) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S.
Shares outside the United States or Canada or to anyone other than a United
States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions, (a) it is not purchasing any International
Shares (as defined below) being sold by it for the account of any United States
or Canadian Person; and (b) it has not offered or sold, and will not offer or
sell, directly or indirectly, any International Shares or distribute any
prospectus relating to the International Shares within the United States or
Canada or to any United States or Canadian Person. With respect to any
Underwriter that is a U.S. Underwriter and an International Underwriter, the
foregoing representations and agreements (i) made by it in its capacity as a
U.S. Underwriter shall apply only to shares purchased by it in its capacity as a
U.S. Underwriter, (ii) made by it in its capacity as an International
Underwriter shall apply only to shares purchased by it in its capacity as an
International Underwriter and (iii) do not restrict its ability to distribute
any prospectus relating to the shares of CarMax Stock to any person. The
foregoing limitations do not apply to stabilization actions or to certain other
transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person) and includes any United States or Canadian branch of a person
who is otherwise not a United States or Canadian Person. All shares of CarMax
Stock to be purchased by the U.S. Underwriters and the International
Underwriters under the Underwriting Agreement are referred to herein as the
"U.S. Shares" and the "International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of CarMax Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the Price to Public set forth on
80
<PAGE>
the cover page hereof, in United States dollars, less an amount not greater than
the per share amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of CarMax Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of shares of CarMax Stock
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made. Each U.S. Underwriter has further agreed to send to any dealer who
purchases from it any shares of CarMax Stock a notice stating in substance that,
by purchasing such shares of CarMax Stock, such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares of CarMax Stock in Canada or to, or for the
benefit of, any resident of Canada in contravention of the securities laws of
Canada or any province or territory thereof and that any offer of shares of
CarMax Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of CarMax Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (a) it has not offered
or sold and will not, during the period of six months from the date of the
Offering, offer or sell any shares of CarMax Stock in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of CarMax Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of CarMax Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988, or to any person to whom
the document may lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and agrees not to offer or sell, directly or indirectly, in Japan or to or
for the account of any resident thereof, any of the shares of CarMax Stock
acquired in connection with the distribution contemplated hereby, except for
offers or sales to Japanese International Underwriters or dealers and except
pursuant to an exemption from the registration requirements of the Securities
and Exchange Law of Japan. Each International Underwriter further agrees to send
to any dealer who purchases from it any of the shares of CarMax Stock a notice
stating in substance that, by purchasing such shares, such dealer represents and
agrees that it has not offered or sold and will not offer or sell any of such
shares, directly or indirectly, in Japan or to or for the account of any
resident thereof except pursuant to an exemption from the registration
requirements of the Securities and Exchange Law of Japan, and that such dealer
will send to any other dealer to whom it sells any of such shares of CarMax
Stock a notice containing substantially the same statement as contained in the
foregoing.
The Underwriters initially propose to offer part of the shares of CarMax
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain dealers. After the initial offering of
the shares of CarMax Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company has granted the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 2,829,000 additional shares of
CarMax Stock at the Price to Public set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the Offering. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of CarMax Stock as
the number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of CarMax Stock offered by the U.S.
Underwriters hereby.
The Company, all officers of the Company and its subsidiaries who hold
CarMax Stock Options and certain employees of the Company and its subsidiaries
who hold CarMax Stock Options have agreed in the Underwriting Agreement that,
without the prior written consent of Morgan Stanley & Co. Incorporated, they
will not (a) offer, pledge, sell, contract to sell,
81
<PAGE>
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of the CarMax Stock or any
securities convertible into or exercisable or exchangeable for the CarMax Stock
(whether such shares or any such securities are then owned by such person or are
thereafter acquired), or (b) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the CarMax Stock, whether any such transaction described in clause
(a) or (b) of this paragraph is to be settled by delivery of the CarMax Stock or
such other securities, in cash or otherwise, for a period of 180 days after the
date of this Prospectus, provided that during such 180 day period the Company
may issue shares and grant stock options and similar rights under employee
benefit plans and such officers may transfer shares by gift to persons who agree
to such restrictions. The outside directors of the Company are not subject to
the foregoing restrictions because they do not currently hold any shares of
CarMax Stock or options to acquire shares of CarMax Stock.
Prior to the Offering, there has been no public market for the CarMax
Stock. The initial public offering price will be negotiated among the Company
and the U.S. Representatives and the International Representatives. Among the
factors to be considered in determining the initial public offering price of the
CarMax Stock, in addition to prevailing market conditions, will be the CarMax
Group's historical performance, estimates of the business potential and earnings
prospects of the CarMax Groups, an assessment of the CarMax Group's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Underwriters have agreed to reimburse the Company for certain expenses
incurred by the Company in connection with the Offering.
From time to time, certain of the Underwriters and their affiliates have
provided, and may continue to provide, investment banking services to the
Company.
The Company has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL MATTERS
The validity of the shares of CarMax Stock and the related CarMax Rights
offered hereby will be passed upon for the Company by McGuire, Woods, Battle &
Boothe, L.L.P., Richmond, Virginia. Certain legal matters will be passed upon
for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York. Simpson Thacher & Bartlett will
rely upon McGuire, Woods, Battle & Boothe, L.L.P. as to certain matters of
Virginia law. Lawyers of McGuire, Woods, Battle & Boothe, L.L.P. own
approximately 12,000 shares of the Company's existing common stock.
EXPERTS
The (i) consolidated financial statements of the Company as of February 29,
1996 and February 28, 1995, and for each of the years in the three-year period
ended February 29, 1996 included herein, (ii) financial statements of the CarMax
Group as of February 29, 1996 and February 28, 1995 and for each of the years in
the three-year period ended February 29, 1996 included herein and (iii)
financial statements of the Circuit City Group as of February 29, 1996 and
February 28, 1995, and for each of the years in the three-year period ended
February 29, 1996 incorporated by reference herein from Annex VI of the
Company's Proxy Statement filed with the Commission on December 24, 1996, have
been included or incorporated herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
82
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a Worldwide Web site (address:
http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of the Company is listed on the New York Stock
Exchange. Reports, proxy and information statements and other information
concerning the Company may also be inspected and copied at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York, 10005.
As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained in the Registration Statement on
Form S-3 (the "Registration Statement") of which this Prospectus is a part. For
such information, reference is made to the Registration Statement and the
exhibits thereto. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete; with respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement or incorporated by reference herein, reference is made to
such contract, agreement or other document for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
83
<PAGE>
GLOSSARY OF DEFINED TERMS
Set forth below is a list of certain defined terms used herein and the page
of this Prospectus on which each such term is defined.
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- -------------------------------------------------------------------------- -----------------
<S> <C>
Acquiring Person.......................................................... 73
Affiliated Transactions................................................... 75
Amended Articles.......................................................... 58
Amendments................................................................ 58
Articles.................................................................. 58
CarMax.................................................................... 4
CarMax Group.............................................................. 59
CarMax Group Available Dividend Amount.................................... 59
CarMax Group Companies.................................................... 59
CarMax Group Net Earnings (Loss).......................................... 60
CarMax Group Subsidiaries................................................. 65
CarMax Right.............................................................. 73
CarMax Stock.............................................................. 4
CarMax Stock Options...................................................... 4
CarMax Stock Proposal..................................................... 8
CarMax Stock Proposal Amendments.......................................... 58
Circuit City.............................................................. 4
Circuit City Group........................................................ 60
Circuit City Group Available Dividend Amount.............................. 59
Circuit City Group Net Earnings (Loss).................................... 61
Circuit City Group Subsidiaries........................................... 65
Circuit City Right........................................................ 73
Circuit City Stock........................................................ 4
Code...................................................................... 78
Commission................................................................ 3
Common Stock.............................................................. 58
Common Stock Redesignation................................................ 8
Company................................................................... 4
Control Share Acquisition................................................. 76
Convertible Securities.................................................... 62
Disinterested Director.................................................... 75
Disposition............................................................... 61
Distribution Date......................................................... 73
Exchange Act.............................................................. 3
Expiration Date........................................................... 73
Fair Value................................................................ 62
Franchise Agreement....................................................... 16
Inter-Group Interest...................................................... I-1
Inter-Group Interest Fraction............................................. 11
Interested Shareholder.................................................... 75
Liquidation Unit.......................................................... 10
Market Capitalization..................................................... 63
Market Value.............................................................. 63
Market Value Ratio of the CarMax Stock to the Circuit City Stock.......... 63
Market Value Ratio of the Circuit City Stock to the CarMax Stock.......... 63
Meeting................................................................... 4
Nasdaq NMS................................................................ 63
Net Proceeds.............................................................. 64
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- -------------------------------------------------------------------------- -----------------
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest........ 71
NYSE...................................................................... 23
Original Rights........................................................... 73
Outstanding CarMax Fraction............................................... 11
Ownership Trigger Date.................................................... 73
Principal Economic Terms.................................................. 74
Publicly Traded........................................................... 64
Redemption Price.......................................................... 74
Related Business Transaction.............................................. 64
Restated Rights Agreement................................................. 73
Rights.................................................................... 73
Rights Agreement.......................................................... 73
Series E Preferred Stock.................................................. 58
Series F Preferred Stock.................................................. 73
Series E Purchase Price................................................... 74
Series F Purchase Price................................................... 74
Stock Incentive Plan...................................................... 4
Trading Day............................................................... 64
VSCA...................................................................... 18
</TABLE>
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ANNEX I
ILLUSTRATIONS OF CERTAIN TERMS
The following illustrations demonstrate the calculations of the Circuit
City Group's Inter-Group Interest in the CarMax Group based on the assumptions
set forth herein and using (i) 175 million shares as the number of shares
designated and authorized for issuance as CarMax Stock and (ii) 75.44 million
shares as the number of shares of CarMax Stock initially issuable with respect
to the Circuit City Group's Inter-Group Interest in the CarMax Group (the
"Number of Shares Issuable with Respect to the Inter-Group Interest").
Accordingly, 75.44 million shares is the number of shares of CarMax Stock that
initially represents 100% of the common shareholders' equity of the CarMax Group
("Equity Value"), without giving effect to the CarMax Stock Options. Unless
otherwise stated, each illustration below should be read independently as if
none of the other transactions referred to below had occurred.
At any time, the fractional interest in the Equity Value of the CarMax
Group that is held by the holders of the outstanding CarMax Stock (the
"Outstanding CarMax Fraction") will be equal to:
Outstanding Shares of CarMax Stock
---------------------------------------------
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The balance of the Equity Value of the CarMax Group is for the account of
the Circuit City Group (the "Inter-Group Interest"), and, at any time, the
fractional interest in the Equity Value of the CarMax Group that is represented
by the Inter-Group Interest (the "Inter-Group Interest Fraction") will be equal
to:
Number of Shares Issuable with Respect to the
Inter-Group Interest
---------------------------------------------
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The sum of the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction will always equal 100%.
CARMAX STOCK OFFERING
The following illustration (as well as all subsequent illustrations)
assumes the sale by the Company of 18.86 million shares of CarMax Stock for the
account of the CarMax Group in the Offering.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 0
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after CarMax Stock Offering.............................. 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) As a result of the Offering, the issued and outstanding shares of
CarMax Stock (18.86 million) would represent an Outstanding CarMax
Fraction of 20.0%, calculated as follows:
18.86 million
-----------------------------------
18.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 80.0%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 400% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(75.44 million) to the total number of shares of CarMax Stock
issued
I-1
<PAGE>
and outstanding following the initial public offering (18.86
million)). If, for example, a dividend of $0.10 per share were
declared and paid on the 18.86 million shares of CarMax Stock
outstanding (an aggregate of $1,886,000), the Circuit City Group
financial statements would be credited with $7,544,000, and the
CarMax Group financial statements would be charged with that
amount in addition to the $1,886,000 dividend paid to the holders
of the outstanding CarMax Stock (for a total of $9,430,000).
(Bullet) Immediately after the Offering, the Company would have 156.14
million shares of CarMax Stock designated and available for
issuance (175 million less 18.86 million issued and outstanding).
FUTURE OFFERINGS OF CARMAX STOCK
The following illustrations reflect the sale by the Company of 5 million
shares of CarMax Stock after the Offering.
OFFERING FOR THE CARMAX GROUP
Assume all of such shares are identified for the account of the CarMax
Group as an additional equity interest in the CarMax Group, with the net
proceeds reflected in the financial statements of the CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after Offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 24.0%,
calculated as follows:
23.86 million
-----------------------------------
23.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 76.0%.
(Bullet) After such future offering, in the event of any dividend or other
distribution paid on the outstanding shares of CarMax Stock (other
than a dividend or other distribution payable in shares of CarMax
Stock), the financial statements of the Circuit City Group would
be credited, and the financial statements of the CarMax Group
would be charged, with a total amount equal to 316.2% of the
aggregate amount of such dividend or distribution (representing
the ratio of the Number of Shares Issuable with Respect to the
Inter-Group Interest (75.44 million) to the total number of shares
of CarMax Stock issued and outstanding following the public
offering (23.86 million)).
(Bullet) Immediately after the Offering, the Company would have 151.14
million shares of CarMax Stock designated and available for
issuance (175 million less 23.86 million issued and outstanding).
OFFERING FOR THE CIRCUIT CITY GROUP
Assume all of such shares are identified for the account of the Circuit
City Group with respect to the Inter-Group Interest, with the net proceeds
reflected in the financial statements of the Circuit City Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of any shares of CarMax
Stock issued for the account of the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
offering............................................................................ 75.44 million
Shares issued in offering............................................................. 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after offering..... 70.44 million
--------------
--------------
</TABLE>
I-2
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 25.3%,
calculated as follows:
23.86 million
-----------------------------------
23.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 74.7%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 295.2% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(70.44 million) to the total number of shares of CarMax Stock
issued and outstanding following the public offering (23.86
million)).
(Bullet) Immediately after the public offering, the Company would have
151.14 million shares of CarMax Stock designated and available for
issuance (175 million less 23.86 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES
If the Company were to issue any debt or preferred stock convertible into
shares of CarMax Stock, the Outstanding CarMax Fraction and the Inter-Group
Interest Fraction would be unchanged at the time of such issuance. If any shares
of CarMax Stock were issued upon conversion of such convertible securities,
however, then the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction would be affected as shown above under "Offering for the CarMax Group,"
if such convertible securities were allocated to the CarMax Group, or under
"Offering for the Circuit City Group," if such convertible securities were
allocated to the Circuit City Group.
CARMAX STOCK DIVIDENDS
The following illustrations reflect dividends of CarMax Stock on
outstanding CarMax Stock and outstanding Circuit City Stock, respectively, after
the Offering.
CARMAX STOCK DIVIDEND ON CARMAX STOCK
Assume the Company declares a dividend of one share of CarMax Stock on each
outstanding share of CarMax Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after dividend........................................... 37.72 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased proportionately to reflect the stock
dividend payable in shares of CarMax Stock to holders of CarMax
Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend........................................................................... 75.44 million
Adjustment to reflect dividend of shares on outstanding shares of CarMax Stock....... 75.44 million
---------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend.... 150.88 million
---------------
---------------
</TABLE>
The total issued and outstanding shares of CarMax Stock (37.72 million)
would continue to represent an Outstanding CarMax Fraction of 20.0%,
calculated as follows:
37.72 million
-----------------------------------
37.72 million + 150.88 million
The Inter-Group Interest Fraction accordingly would continue to be 80.0%.
(Bullet) Immediately after the dividend, the Company would have 137.28
million shares of CarMax Stock designated and available for
issuance (175 million less 37.72 million issued and outstanding).
I-3
<PAGE>
CARMAX STOCK DIVIDEND ON CIRCUIT CITY STOCK
Assume 100 million shares of Circuit City Stock are outstanding and the
Company declares a dividend of 1/10 of a share of CarMax Stock on each
outstanding share of Circuit City Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 10 million
--------------
Total issued and outstanding after dividend........................................... 28.86 million
--------------
--------------
</TABLE>
(Bullet) Any dividend of shares of CarMax Stock to the holders of shares of
Circuit City Stock will be treated as a dividend of shares
issuable with respect to the Inter-Group Interest. As a result,
the Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of shares of CarMax Stock
dividended to the holders of Circuit City Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend............................................................................ 75.44 million
Shares dividended on outstanding shares of Circuit City Stock......................... 10 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend..... 65.44 million
--------------
--------------
</TABLE>
The Company will not dividend to holders of Circuit City Stock a number
of shares of CarMax Stock exceeding the then Number of Shares Issuable
with Respect to the Inter-Group Interest.
(Bullet) The total issued and outstanding shares (28.86 million) would
represent an Outstanding Interest Fraction of 30.6%, calculated as
follows:
28.86 million
-----------------------------------
28.86 million + 65.44 million
The Inter-Group Interest Fraction would accordingly be 69.4%. Note,
however, that after the dividend the holders of Circuit City Stock would
also hold 10 million shares of CarMax Stock, which would represent a
direct interest of 10.6% in the equity value of the CarMax Group (and,
together with the 69.4% Inter-Group Interest, would continue to be a
total interest in the equity value of the CarMax Group of 80.0%).
(Bullet) Immediately after the dividend, the Company would have 146.14
million shares of CarMax Stock designated and available for
issuance (175 million less 28.86 million issued and outstanding).
REPURCHASES OF CARMAX STOCK
The following illustrations reflect the repurchase by the Company of 5
million shares of CarMax Stock after the Offering.
REPURCHASE WITH CARMAX GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the CarMax Group, with the financial statements of the CarMax Group
being charged with the consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the repurchase of
any shares of CarMax Stock with funds allocated to the CarMax
Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 15.5%,
calculated as follows:
13.86 million
-----------------------------------
13.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 84.5%.
I-4
<PAGE>
(Bullet) Immediately after the repurchase, the Company would have 161.14
million shares of CarMax Stock designated and available for
issuance (175 million less 13.86 million issued and outstanding).
REPURCHASE WITH CIRCUIT CITY GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the Circuit City Group, with the financial statements of the
Circuit City Group being charged with the consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased by the number of any shares of CarMax
Stock repurchased with funds allocated to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
repurchase.......................................................................... 75.44 million
Shares repurchased with funds allocated to Circuit City Group......................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after repurchase... 80.44 million
--------------
--------------
</TABLE>
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 14.7%,
calculated as follows:
13.86 million
-----------------------------------
13.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 85.3%.
(Bullet) Immediately after the repurchase, the Company would have 161.14
million shares of CarMax Stock designated and available for
issuance (175 million less 13.86 million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN GROUPS
CONTRIBUTION OF ASSETS FROM CIRCUIT CITY GROUP TO CARMAX GROUP
The following illustration reflects the contribution as additional equity
by the Circuit City Group to the CarMax Group after the Offering of $100 million
of assets attributed to the Circuit City Group on a date on which the Fair
Market Value of CarMax Stock is $20 per share.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after contribution....................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased to reflect the contribution to the
CarMax Group of assets attributed to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
contribution........................................................................ 75.44 million
Adjustment to reflect contribution to CarMax Group of assets attributed to Circuit
City Group.......................................................................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after
contribution........................................................................ 80.44 million
--------------
--------------
</TABLE>
I-5
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 19.0%,
calculated as follows:
18.86 million
-----------------------------------
18.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 81.0%.
(Bullet) Immediately after the contribution, the Company would have 156.14
million shares of CarMax Stock designated and available for
issuance (175 million less 18.86 million issued and outstanding).
TRANSFER OF ASSETS FROM CARMAX GROUP TO CIRCUIT CITY GROUP
The following illustration reflects the transfer by the CarMax Group to the
Circuit City Group after the Offering of $100 million of assets attributed to
the CarMax Group on a date on which the Fair Market Value of CarMax Stock is $20
per share, assuming such transfer has been determined by the Board of Directors
to be treated as a reduction in the Circuit City Group's equity interest in the
CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after transfer........................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased to reflect the contribution to the
Circuit City Group of assets allocated to the CarMax Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
transfer............................................................................ 75.44 million
Adjustment to reflect transfer to Circuit City Group of assets allocated to CarMax
Group............................................................................... 5 million
-------------
Number of Shares Issuable with Respect to the Inter-Group Interest after transfer..... 70.44 million
-------------
-------------
</TABLE>
The Company will not make transfers of assets of the CarMax Group to the
Circuit City Group the fair value of which exceeds the Fair Market Value
of the then Number of Shares Issuable with Respect to the Inter-Group
Interest.
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 21.1%,
calculated as follows:
18.86 million
-----------------------------------
18.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 78.9%.
(Bullet) Immediately after the transfer, the Company would have 156.14
million shares of CarMax Stock designated and available for
issuance (175 million less 18.86 million issued and outstanding).
I-6
<PAGE>
CARMAX GROUP FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Statements of Operations -- Years Ended February 29 or 28, 1996, 1995 and 1994....................................... F-2
Balance Sheets -- February 29 or 28, 1996 and 1995................................................................... F-3
Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994....................................... F-4
Statements of Accumulated Group Deficit -- Years Ended February 29 or 28, 1996, 1995 and 1994........................ F-5
Notes to Group Financial Statements.................................................................................. F-6
Report of KPMG Peat Marwick LLP, Independent Auditors................................................................ F-16
INTERIM FINANCIAL STATEMENTS
Statements of Operations -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................................. F-17
Balance Sheets -- November 30, 1996 (unaudited) and February 29, 1996................................................ F-18
Statements of Cash Flows -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................................. F-19
Notes to Group Financial Statements (unaudited)...................................................................... F-20
</TABLE>
F-1
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
---------------------------------------------------------
1996 % 1995 % 1994 %
-------- ----- ------- ----- ------- -----
<S> <C>
(AMOUNTS IN THOUSANDS)
NET SALES AND OPERATING REVENUES.................................. $275,857 100.0 $77,002 100.0 $16,176 100.0
Cost of sales..................................................... 252,284 91.4 72,147 93.7 14,202 87.8
-------- ----- ------- ----- ------- -----
GROSS PROFIT...................................................... 23,573 8.6 4,855 6.3 1,974 12.2
-------- ----- ------- ----- ------- -----
Selling, general and administrative expenses (Notes 3 and 12)..... 28,440 10.3 10,792 14.0 4,849 30.0
Interest expense (Note 7)......................................... 4,075 1.5 1,045 1.4 161 1.0
-------- ----- ------- ----- ------- -----
TOTAL EXPENSES.................................................... 32,515 11.8 11,837 15.4 5,010 31.0
-------- ----- ------- ----- ------- -----
Loss before income tax benefit.................................... 8,942 3.2 6,982 9.1 3,036 18.8
Income tax benefit (Notes 3 and 8)................................ 3,707 1.3 2,875 3.8 1,239 7.7
-------- ----- ------- ----- ------- -----
NET LOSS.......................................................... $ 5,235 1.9 $ 4,107 5.3 $ 1,797 11.1
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
</TABLE>
See accompanying notes to group financial statements.
F-2
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
--------------------
1996 1995
-------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash................................................................................................ $ 2,219 $ 2,159
Net accounts receivable (Note 4).................................................................... 16,562 44,326
Inventory........................................................................................... 61,672 46,471
Prepaid expenses and other current assets........................................................... 772 589
-------- --------
TOTAL CURRENT ASSETS............................................................................. 81,225 93,545
Property and equipment, net (Notes 6 and 7)......................................................... 19,860 19,655
Deferred income taxes (Note 8)...................................................................... 1,560 1,093
-------- --------
TOTAL ASSETS..................................................................................... $102,645 $114,293
-------- --------
-------- --------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................................................... $ 12,399 $ 6,476
Short-term debt (Note 7)............................................................................ 18,050 --
Deferred income taxes (Note 8)...................................................................... 2,276 699
Accrued expenses and other current liabilities...................................................... 1,164 756
-------- --------
TOTAL CURRENT LIABILITIES........................................................................ 33,889 7,931
Long-term debt (Note 7)............................................................................. 78,519 111,629
Deferred revenue and other liabilities.............................................................. 1,438 699
-------- --------
TOTAL LIABILITIES................................................................................ 113,846 120,259
-------- --------
ACCUMULATED GROUP DEFICIT............................................................................. (11,201) (5,966)
-------- --------
Commitments and contingent liabilities (Notes 1, 4, 5, 10, 11, 13 and 14)
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT.................................................. $102,645 $114,293
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
F-3
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss................................................................................. $ (5,235) $ (4,107) $ (1,797)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation.......................................................................... 821 259 60
Provision for deferred income taxes................................................... 1,110 412 (805)
Increase in deferred revenue and other liabilities.................................... 739 608 91
Decrease (increase) in net accounts receivable........................................ 27,764 (34,001) (8,871)
Increase in inventory, prepaid expenses and other current assets...................... (15,384) (35,720) (11,341)
Increase in accounts payable, accrued expenses and other current liabilities.......... 6,331 4,540 2,679
-------- -------- --------
Net cash provided by (used in) operating activities...................................... 16,146 (68,009) (19,984)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment...................................................... (26,776) (32,990) (7,284)
Proceeds from sales of property and equipment............................................ 25,750 14,300 6,000
-------- -------- --------
Net cash used in investing activities.................................................... (1,026) (18,690) (1,284)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net........................................... 18,050 -- --
(Principal payments on) proceeds from issuance of long-term debt, net.................... (33,110) 87,253 22,825
-------- -------- --------
Net cash (used in) provided by financing activities...................................... (15,060) 87,253 22,825
-------- -------- --------
Increase in cash........................................................................... 60 554 1,557
Cash at beginning of year.................................................................. 2,159 1,605 48
-------- -------- --------
Cash at end of year........................................................................ $ 2,219 $ 2,159 $ 1,605
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to group financial statements.
F-4
<PAGE>
CARMAX GROUP
STATEMENTS OF ACCUMULATED GROUP DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
GROUP DEFICIT
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT MARCH 1, 1993............................................................................... $ (62)
Net loss............................................................................................... (1,797)
----------
BALANCE AT FEBRUARY 28, 1994........................................................................... (1,859)
Net loss............................................................................................... (4,107)
----------
BALANCE AT FEBRUARY 28, 1995........................................................................... (5,966)
Net loss............................................................................................... (5,235)
----------
BALANCE AT FEBRUARY 29, 1996........................................................................... $(11,201)
----------
----------
</TABLE>
See accompanying notes to group financial statements.
F-5
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Board of Directors of Circuit City Stores, Inc. (the "Company") has
adopted a proposal (the "CarMax Stock Proposal") which, if approved by
shareholders and implemented by the Board of Directors, would effect a
comprehensive plan that will result in a restructuring of the existing Common
Stock of the Company into two new series of Common Stock intended to reflect
separately the performance of the Company's two main businesses -- the used and
new car retail business (the "CarMax Group") and the consumer electronics, major
appliances, personal computer and music software retail business, including its
interest in the CarMax Group referred to below (the "Circuit City Group"). Under
the CarMax Stock Proposal, the Board of Directors would be authorized to
designate and issue shares of a new series of Common Stock to be called Circuit
City Stores, Inc. -- CarMax Group Common Stock, par value $0.50 per share
("CarMax Stock"), which is intended to reflect separately the performance of the
CarMax Group. In addition, each share of the Company's existing Common Stock
would be redesignated as a share of a new series of Common Stock to be called
Circuit City Stores, Inc. -- Circuit City Group Common Stock, par value $0.50
per share ("Circuit City Stock"), which is intended to reflect separately the
performance of the Circuit City Group, which is generally comprised of (i) the
Company's consumer electronics, major appliances, personal computer and music
software retail business, (ii) an interest in the CarMax Group, which excludes
the interest represented by any outstanding shares of CarMax Stock, as described
below, and (iii) all other businesses in which the Company or any of its
subsidiaries may be engaged (other than those comprising the CarMax Group). The
CarMax Group and the Circuit City Group are sometimes referred to collectively
as the "Groups" and individually as a "Group."
Following approval of the CarMax Stock Proposal, the Company currently
intends, subject to prevailing market and other conditions, to offer shares of
CarMax Stock initially representing 20 percent of the equity value of the CarMax
Group, without giving effect to the CarMax Stock Options, to the public for cash
in a public offering (the "Offering"). The Company intends to allocate the
proceeds of the Offering to the CarMax Group. Upon completion of the Offering,
the Circuit City Group will hold an interest (the "Inter-Group Interest") in 80
percent of the equity value of the CarMax Group.
The CarMax Group and the Circuit City Group financial statements comprise
all of the accounts included in the corresponding consolidated financial
statements of the Company. The separate Group financial statements give effect
to the management and allocation policies adopted by the Board of Directors, as
described under "Corporate Activities" below. The CarMax Group financial
statements have been prepared on a basis that management believes to be
reasonable and appropriate and include (i) the historical financial position,
results of operations and cash flows of the CarMax Group, (ii) an allocated
portion of the Company's debt, including the related effects upon results of
operations and cash flow and (iii) an allocated portion of the Company's
corporate general and administrative costs.
If the CarMax Stock Proposal is approved and implemented, the Company will
provide to holders of both CarMax Stock and Circuit City Stock separate
financial statements, management's discussion and analysis of results of
operations and financial condition, description of business and other relevant
information for the CarMax Group, the Circuit City Group and the Company.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Stock and holders of Circuit City Stock
will be shareholders of the Company and will continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company contemplated by the CarMax Stock Proposal will
not affect title to the assets or responsibility for the liabilities of the
Company or any of its subsidiaries. As a result, the CarMax Stock Proposal will
not affect the rights of holders of the Company's or any of its subsidiaries'
debt. The results of operations or financial condition of either Group could
affect the results of operations or financial condition of the other Group and
the market price of the series of Common Stock relating to that Group. In
addition, any net losses of the CarMax Group or the Circuit City Group and
dividends or distributions on, or repurchases of, CarMax Stock or Circuit City
Stock will reduce the assets of the Company legally available for payment of
dividends on both the CarMax Stock and the Circuit City Stock. Accordingly, the
CarMax Group's financial information should be read in conjunction with the
Company's consolidated financial information and the Circuit City Group's
financial information.
F-6
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
1. BASIS OF PRESENTATION -- Continued
The management and allocation policies applicable to the preparation of the
financial statements of the CarMax Group and the Circuit City Group may be
modified or rescinded, or additional policies may be adopted, at the sole
discretion of the Board of Directors without approval of the shareholders,
although the Board of Directors has no present plans to do so. Any determination
of the Board of Directors to modify or rescind such policies, or to adopt
additional policies, including any such decision that would have disparate
effects upon holders of CarMax Stock and holders of Circuit City Stock, would be
made by the Board of Directors in its good faith business judgment of the
Company's best interests, taking into consideration the interests of all common
shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) INSTALLMENT AUTO LOAN RECEIVABLES
Installment auto loan receivables ("installment receivables") held for
investment are stated at cost. Installment receivables held for sale are stated
at the lower of cost or market. As of February 29, 1996, and February 28, 1995,
cost approximates market.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company enters into financial instruments on behalf of the CarMax
Group. The carrying value of the CarMax Group's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. Credit risk is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the CarMax Group does not anticipate loss for
nonperformance. All financial instruments are diversified along industry,
product and geographic areas. As discussed in Note 5, swaps are not held for
trading purposes and, therefore, are not carried at fair value.
(C) INVENTORY
Inventory is stated at the lower of cost or market. Vehicle inventory cost
is determined by specific identification. Parts and labor used to recondition
vehicles, as well as transportation and other incremental expenses associated
with acquiring vehicles, are included in inventory.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the assets'
estimated useful lives, which range from three to 15 years.
(E) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(F) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred
income taxes reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and the
amounts recognized for income tax purposes, measured by applying currently
enacted tax laws. A deferred tax asset is recognized if it is more likely than
not that a benefit will be realized.
F-7
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(G) DEFERRED REVENUE
The CarMax Group sells its own service policies and service policies on
behalf of unrelated third parties. Policies usually have terms of coverage
between 12 and 72 months. All revenue from the sale of the CarMax Group's own
service policies is deferred and amortized over the life of the policies
consistent with the pattern of repair experience of the industry. Incremental
direct contract costs related to the sale of policies are deferred and charged
to expense in proportion to the revenue recognized. All other costs are charged
to expense as incurred. Commission revenue for the unrelated third-party service
policies is recognized at the time of sale.
(H) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by FNAC are recorded as a reduction to selling,
general and administrative expenses.
(I) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(J) EARNINGS OR LOSS PER SHARE
Historical loss per share is omitted from the statements of operations
since the CarMax Stock was not part of the capital structure of the Company for
the periods presented. Following implementation of the CarMax Stock Proposal,
the method of calculating earnings per share for the CarMax Group would reflect
the terms of the proposed amendments to the Company's Amended and Restated
Articles of Incorporation and would be computed by dividing the product of (i)
earnings or losses of the CarMax Group and (ii) the "Outstanding CarMax
Fraction" by the weighted average number of shares of CarMax Stock and dilutive
CarMax Stock equivalents outstanding during the applicable period. The
"Outstanding CarMax Fraction" is the fractional interest in earnings or losses
of the CarMax Group and the equity of the CarMax Group that is represented by
the shares of CarMax Stock that are outstanding at any particular time, and is
equal to a fraction the numerator of which is such number of shares of CarMax
Stock outstanding and the denominator of which is the number of shares of CarMax
Stock that, if issued, would represent 100 percent of the equity of the CarMax
Group.
(K) RISKS AND UNCERTAINTIES
The diversity of the CarMax Group's customers and suppliers reduces the
risk that a severe impact will occur in the near term as a result of changes in
its customer base, competition or sources of supply. The CarMax Group operations
currently are concentrated in the southeastern United States. A severe economic
downturn in the southeastern United States could negatively impact the CarMax
Group's operating results. Due to the CarMax Group's geographic concentration
and limited overall size, management cannot assure that unanticipated events
will not have a negative impact on the Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(L) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the Board of Directors to various
corporate activities, as described below.
(A) FINANCIAL ACTIVITIES
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt.
F-8
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
3. CORPORATE ACTIVITIES -- Continued
(B) DEBT AND INTEREST EXPENSE
Allocated debt of the CarMax Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the CarMax Group and (ii) a portion
of the Company's debt that is allocated between the Circuit City Group and the
CarMax Group ("pooled debt"). For the periods covered by the CarMax Group's
financial statements, all debt consists of an allocated portion of the pooled
debt. The pooled debt bears interest at a rate based on the weighted average
interest rate of such debt calculated on a periodic basis and applied to the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of such pooled debt as a whole.
(C) CORPORATE GENERAL AND ADMINISTRATIVE COSTS
Corporate general and administrative costs and other shared services
generally have been allocated to the CarMax Group based upon utilization of such
services by the CarMax Group. Where determinations based on utilization alone
have been impracticable, other methods and criteria were used that management
believes are equitable and provide a reasonable estimate of the cost
attributable to the CarMax Group.
(D) INCOME TAXES
The CarMax Group is included in the consolidated federal income tax return
filed by the Company. Accordingly, the provision for federal income taxes and
related payments of tax are determined on a consolidated basis. The financial
statement provision and the related tax payments or refunds are reflected in the
Circuit City Group's and the CarMax Group's financial statements in accordance
with the Company's tax allocation policy for such Groups. In general, this
policy provides that the consolidated tax provision and related tax payments or
refunds will be allocated between the Circuit City Group and the CarMax Group
based principally upon the financial income, taxable income, credits and other
amounts directly related to the respective Group. Tax benefits that cannot be
used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits. As
a result, the allocated group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the Groups had filed
separate tax returns.
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Trade receivables.......................................... $ 4,001 $ 340
Installment receivables held for sale...................... 6,941 44,292
Installment receivables held for investment................ 6,065 --
------- -------
17,007 44,632
Less allowance for doubtful accounts....................... 445 306
------- -------
Net accounts receivable.................................... $16,562 $44,326
------- -------
------- -------
</TABLE>
In fiscal 1996, the Company entered into a securitization transaction on
behalf of the CarMax Group to finance the installment receivables generated by
First North American Credit ("FNAC,") the Group's installment lending division.
No gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables....................................................... $ 93,065
Interest retained by CarMax Group............................................. (6,065)
--------
Net receivables transferred with recourse..................................... $ 87,000
--------
--------
Program capacity.............................................................. $100,000
--------
--------
</TABLE>
F-9
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS -- Continued
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The CarMax Group believes that as of February 29, 1996, no
liability existed under the recourse provision. As of April 1, 1996, the program
capacity increased to $125 million. FNAC's servicing revenue totalled $2.0
million for fiscal 1996, $2.0 million for fiscal 1995 and $0.4 million for
fiscal 1994.
5. INTEREST RATE SWAP
In November 1995, the Company entered into a 50-month amortizing swap on
behalf of the CarMax Group in the notional amount of $75 million relating to the
auto loan receivable securitization to convert variable-rate financing costs to
a fixed-rate obligation. The underlying receivables are issued with a fixed-rate
finance charge. The swap was put in place to better match the variable funding
costs to the receivables being securitized and to preserve net portfolio yield.
Recording the swap at fair value at February 29, 1996, would result in a loss of
$0.3 million.
The market and credit risks associated with this swap are similar to those
relating to other types of financial instruments. Market risk is the exposure
created by potential fluctuations in interest rates and is directly related to
the product type, agreement terms and transaction volume. The CarMax Group does
not anticipate significant market risk from swaps, since their use is to more
closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated counterparties.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Land....................................................... $ 3,826 $ --
Construction in progress................................... 9,190 17,114
Furniture, fixtures and equipment (3 to 8 years)........... 5,515 2,173
Leasehold improvements (10 to 15 years).................... 2,461 682
------- -------
20,992 19,969
Less accumulated depreciation.............................. 1,132 314
------- -------
Property and equipment, net................................ $19,860 $19,655
------- -------
------- -------
</TABLE>
7. DEBT
Long-term pooled debt of the Company at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Term loans........................................................ $275,000 $100,000
Short-term debt expected to be refinanced......................... 100,000 53,000
-------- --------
Total long-term debt.............................................. $375,000 $153,000
-------- --------
-------- --------
Portion of long-term debt allocated to CarMax Group............... $ 78,519 $111,629
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
F-10
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
7. DEBT -- Continued
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.................. $185,789 $134,022 $ 77,392
-------- -------- --------
Maximum short-term debt outstanding.................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
Short-term debt allocated to the CarMax Group at February 29, 1996, was
$18,050,000. The weighted average interest rate on the outstanding short-term
debt was 5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3
percent during fiscal 1994.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $4,074,737, $1,045,153 and $161,472 in fiscal 1996,
1995 and 1994, respectively.
The CarMax Group capitalizes interest in connection with the construction
of certain facilities. In fiscal 1996, interest capitalized amounted to
$1,314,000 ($176,000 and $119,000 in fiscal 1995 and 1994, respectively).
Concurrent with the funding of the $175,000,000 term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175,000,000. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2,500,000.
F-11
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit
follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal............................................................. $(3,670) $(2,536) $ (341)
State............................................................... (1,147) (751) (93)
------- ------- -------
(4,817) (3,287) (434)
------- ------- -------
Deferred:
Federal............................................................. 844 316 (631)
State............................................................... 266 96 (174)
------- ------- -------
1,110 412 (805)
------- ------- -------
Income tax benefit.................................................... $(3,707) $(2,875) $(1,239)
------- ------- -------
------- ------- -------
</TABLE>
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C>
Federal statutory income tax rate............................................ 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit......................... 6.5 6.2 5.8
---- ---- ----
Effective income tax rate.................................................... 41.5% 41.2% 40.8%
---- ---- ----
---- ---- ----
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................ $1,820 $ 990
Organization cost capitalization............................ 92 182
Accrued expenses............................................ -- 86
Other....................................................... -- 3
------ ------
Total gross deferred tax assets.......................... 1,912 1,261
------ ------
Deferred Tax Liabilities:
Depreciation................................................ 352 168
Prepaid expenses............................................ 365 257
Inventory capitalization.................................... 1,907 442
Other....................................................... 4 --
------ ------
Total gross deferred tax liabilities..................... 2,628 867
------ ------
Net deferred tax (liability) asset............................ $ (716) $ 394
------ ------
------ ------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on these considerations, management
believes that it is more likely than not that the gross deferred tax assets at
February 29, 1996, and February 28, 1995, will be realized by the CarMax Group;
therefore, no valuation allowance is necessary.
F-12
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
9. STOCK INCENTIVE PLAN
As of February 29, 1996, there were outstanding options to purchase shares
of stock representing approximately 5% of the corporate entity comprising the
CarMax Group. These options are held by management and key employees of the
CarMax Group and vest evenly on the third, fourth, and fifth anniversary of the
grant date. The exercise price is equal to, or greater than, the fair market
value of the stock at the date of grant.
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, management intends to convert these
options into options to purchase CarMax Group stock. While the issuance of
additional shares will reduce the ownership percentage, the aggregate intrinsic
value of the options will be preserved. In addition, the vesting provisions and
option periods of the original grant will remain the same when converted.
10. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation.
The components of net pension expense for the CarMax Group are as follows
(pension activity related to fiscal 1994 was not material):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-------------------
1996 1995
---- ----
<S> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year................... $140 $34
Interest cost on projected benefit obligation..................... 26 5
Actual return on plan assets...................................... (128) (1)
Net amortization.................................................. 87 (18)
---- ----
Net pension expense............................................... $125 $20
---- ----
---- ----
</TABLE>
F-13
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
10. PENSION PLAN -- Continued
The following table sets forth the CarMax Group's share of the plan's
financial status and amounts recognized in the balance sheets as of February 29
or 28:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested........................................................ $ 242 $ 45
Non-vested.................................................... 32 7
----- -----
Total benefits.................................................. 274 52
Additional amounts related to projected
salary increases.............................................. 215 41
----- -----
Projected benefit obligation for services
rendered to date.............................................. 489 93
Plan assets at fair value....................................... (649) (194)
----- -----
Plan assets in excess of projected
benefit obligation............................................ (160) (101)
Unrecognized loss from past experience.......................... (195) (43)
Unrecognized prior service cost................................. 12 5
Unrecognized net obligation being
recognized over 15 years...................................... 17 7
----- -----
Prepaid pension cost............................................ $(326) $(132)
----- -----
----- -----
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-----------------
1996 1995
---- ----
<S> <C>
Weighted average discount rate........................................ 7.0% 8.0%
Rate of increase in compensation levels............................... 6.0% 6.5%
Rate of return on plan assets......................................... 9.0% 8.0%
---- ----
</TABLE>
11. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased
premises. The CarMax Group's lease obligations are based upon contractual
minimum rates. Rental expenses for all operating leases were $3,850,000,
$1,030,000 and $189,000 in fiscal 1996, 1995 and 1994, respectively.
Most leases provide that the CarMax Group pay taxes, maintenance, insurance
and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of from eight years to 28 years at terms substantially the same as the
initial terms.
F-14
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
11. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING LEASE
FISCAL COMMITMENTS
------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
1997................................................. $ 4,864
1998................................................. 4,823
1999................................................. 4,821
2000................................................. 4,696
2001................................................. 4,657
After 2001........................................... 70,551
----------
Total minimum lease payments......................... $ 94,412
----------
----------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $25,750,000 ($14,300,000 in fiscal 1995 and $6,000,000 in fiscal 1994).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
12. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying statements of operations, amounted
to $7,154,000, $2,202,000 and $703,000 (2.6 percent, 2.9 percent and 4.3 percent
of net sales and operating revenues) in fiscal years 1996, 1995 and 1994,
respectively.
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operation.
14. SUBSEQUENT EVENT
OfficeMax, Inc. has filed suit accusing the Company of infringing
OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The Company denies
such allegations and believes that the CarMax Group's use and registration of
the mark CARMAX and other marks containing MAX do not violate any rights of
OfficeMax, Inc. The Company has filed a complaint requesting, among other
things, that certain of OfficeMax, Inc.'s marks be cancelled or declared void.
OfficeMax, Inc. has filed a similar complaint against the Company. Although it
is not possible to predict the outcome of this litigation, the Company believes
that OfficeMax, Inc.'s position and suit are without merit.
F-15
<PAGE>
CARMAX GROUP
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying balance sheets of the CarMax Group (as
defined in Note 1) as of February 29, 1996 and February 28, 1995 and the related
statements of operations, accumulated group deficit and cash flows for each of
the fiscal years in the three-year period ended February 29, 1996. These
financial statements are the responsibility of Circuit City Stores, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 29, 1996 and February 28, 1995 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
February 29, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
October 25, 1996
F-16
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
---------------------------------------
<S> <C>
1996 % 1995 %
--------- ------ --------- ------
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C>
NET SALES AND OPERATING REVENUES.................................................... $ 375,319 100.0 $ 203,149 100.0
Cost of sales....................................................................... 343,998 91.6 185,980 91.5
--------- ------ --------- ------
GROSS PROFIT........................................................................ 31,321 8.4 17,169 8.5
--------- ------ --------- ------
Selling, general and administrative expenses........................................ 34,842 9.3 20,857 10.3
Interest expense.................................................................... 4,211 1.1 2,994 1.5
--------- ------ --------- ------
TOTAL EXPENSES...................................................................... 39,053 10.4 23,851 11.8
--------- ------ --------- ------
Loss before income tax benefit...................................................... 7,732 2.0 6,682 3.3
Income tax benefit.................................................................. 3,209 0.8 2,773 1.4
--------- ------ --------- ------
NET LOSS............................................................................ $ 4,523 1.2 3,909 1.9
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
See accompanying notes to group financial statements.
F-17
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
NOV. 30, 1996 FEB. 29, 1996
------------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................... $ 8,821 $ 2,219
Net accounts receivable........................................................................ 26,205 16,562
Inventory...................................................................................... 69,234 61,672
Prepaid expenses and other current assets...................................................... 2,544 772
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 106,804 81,225
Property and equipment, net.................................................................... 73,622 19,860
Deferred income taxes.......................................................................... 1,263 1,560
Other assets................................................................................... 2,188 --
------------- -------------
TOTAL ASSETS................................................................................ $ 183,877 $ 102,645
------------- -------------
------------- -------------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................................................... $ 19,125 $ 12,399
Short-term debt................................................................................ 99,758 18,050
Deferred income taxes.......................................................................... 3,443 2,276
Accrued expenses and other current liabilities................................................. 2,421 1,164
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 124,747 33,889
Long-term debt................................................................................. 72,566 78,519
Deferred revenue and other liabilities......................................................... 2,288 1,438
------------- -------------
TOTAL LIABILITIES........................................................................... 199,601 113,846
------------- -------------
ACCUMULATED GROUP DEFICIT........................................................................ (15,724) (11,201)
------------- -------------
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT............................................. $ 183,877 $ 102,645
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to group financial statements.
F-18
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
--------------------
1996 1995
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C>
OPERATING ACTIVITIES:
Net loss............................................................................................. $ (4,523) $ (3,909)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation...................................................................................... 1,307 600
Provision for deferred income taxes............................................................... 1,464 835
Increase in deferred revenue and other liabilities................................................ 850 592
(Increase) decrease in net accounts receivable.................................................... (9,643) 27,420
(Increase) decrease in inventory, prepaid expenses and other current assets....................... (9,334) 5,317
Increase in other assets.......................................................................... (2,188) --
Increase in accounts payable, accrued expenses and other current liabilities...................... 7,983 1,588
-------- --------
Net cash (used in) provided by operating activities.................................................. (14,084) 32,443
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................................. (60,505) (18,719)
Proceeds from sales of property and equipment........................................................ 5,436 15,800
-------- --------
Net cash used in investing activities................................................................ (55,069) (2,919)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net....................................................... 81,708 42,957
Principal payments on long-term debt, net............................................................ (5,953) (72,166)
-------- --------
Net cash provided by (used in) financing activities.................................................. 75,755 (29,209)
-------- --------
Increase in cash....................................................................................... 6,602 315
Cash at beginning of year.............................................................................. 2,219 2,159
-------- --------
Cash at end of period.................................................................................. $ 8,821 $ 2,474
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
F-19
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The group financial statements of the CarMax Group conform to generally
accepted accounting principles. The interim period group financial statements
are unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim group financial statements have been included. The
fiscal year-end balance sheet data were derived from audited group financial
statements. The financial statements included herein should be read in
conjunction with the notes to group financial statements included in the CarMax
Group's 1996 annual financial statements.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
At November 30, 1996, $150 million was drawn on the Company's unsecured
revolving bank credit facility and has been included in the Company's short-term
debt.
3. INTEREST RATE SWAPS
The Company entered into a new 40-month amortizing swap relating to the
CarMax Group's auto loan receivable securitization during the third quarter with
a notional amount of approximately $63 million. Including this new swap,
recording the CarMax Group's interest rate swaps at fair value at November 30,
1996, would result in a loss of approximately $546,000 compared to a loss of
$300,000 at February 29, 1996. The notional amount of the swaps was
approximately $123 million at November 30, 1996, and $75 million at February 29,
1996.
4. SERVICING REVENUE
FNAC's servicing revenue, including gain on sale of receivables in fiscal
1997, totalled $5.8 million for the nine months ended November 30, 1996, and
$1.3 million for the nine months ended November 30, 1995.
F-20
<PAGE>
COMPANY FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Years Ended February 29 or 28, 1996, 1995 and 1994........................... F-22
Consolidated Balance Sheets -- February 29 or 28, 1996 and 1995..................................................... F-23
Consolidated Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994......................... F-24
Consolidated Statements of Stockholders' Equity -- Years Ended February 29 or 28, 1996, 1995 and 1994............... F-25
Notes to Consolidated Financial Statements.......................................................................... F-26
Report of KPMG Peat Marwick LLP, Independent Auditors............................................................... F-36
INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Three and Nine Months Ended November 30, 1996 and 1995 (unaudited)........... F-37
Consolidated Balance Sheets -- November 30, 1996 (unaudited) and February 29, 1996.................................. F-38
Consolidated Statements of Cash Flows -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................... F-39
Notes to Consolidated Financial Statements (unaudited).............................................................. F-40
</TABLE>
F-21
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------------------------------------------
1996 % 1995 % 1994 %
---------- ----- ---------- ----- ---------- -----
<S> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues.......................... $7,029,123 100.0 $5,582,947 100.0 $4,130,415 100.0
Cost of sales, buying and warehousing..................... 5,394,293 76.7 4,197,947 75.2 3,024,759 73.2
---------- ----- ---------- ----- ---------- -----
Gross profit.............................................. 1,634,830 23.3 1,385,000 24.8 1,105,656 26.8
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative expenses (Note 8)..... 1,322,430 18.8 1,106,370 19.8 891,865 21.6
Interest expense (Note 3)................................. 25,400 0.4 10,030 0.2 4,791 0.1
---------- ----- ---------- ----- ---------- -----
Total expenses............................................ 1,347,830 19.2 1,116,400 20.0 896,656 21.7
---------- ----- ---------- ----- ---------- -----
Earnings before income taxes.............................. 287,000 4.1 268,600 4.8 209,000 5.1
Provision for income taxes (Note 4)....................... 107,625 1.5 100,725 1.8 76,600 1.9
---------- ----- ---------- ----- ---------- -----
Net earnings.............................................. $ 179,375 2.6 $ 167,875 3.0 $ 132,400 3.2
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Weighted average common shares and common share
equivalents............................................. 98,546 97,369 97,391
---------- ---------- ----------
---------- ---------- ----------
Net earnings per share.................................... $ 1.82 $ 1.72 $ 1.36
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
------------------------
1996 1995
---------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 43,704 $ 46,962
Net accounts and notes receivable (Note 9)...................................................... 324,395 264,565
Merchandise inventory........................................................................... 1,323,183 1,035,776
Deferred income taxes (Note 4).................................................................. 26,996 25,696
Prepaid expenses and other current assets....................................................... 17,399 14,162
---------- ----------
TOTAL CURRENT ASSETS......................................................................... 1,735,677 1,387,161
Property and equipment, net (Notes 2 and 3)..................................................... 774,265 592,956
Deferred income taxes (Note 4).................................................................. -- 5,947
Other assets.................................................................................... 16,080 17,991
---------- ----------
TOTAL ASSETS................................................................................. $2,526,022 $2,004,055
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt (Notes 3 and 7).......................................... $ 1,436 $ 2,378
Accounts payable................................................................................ 604,488 576,578
Short-term debt................................................................................. 92,087 --
Accrued expenses and other current liabilities.................................................. 123,789 113,631
Accrued income taxes............................................................................ 9,375 13,533
---------- ----------
TOTAL CURRENT LIABILITIES.................................................................... 831,175 706,120
Long-term debt, excluding current installments (Notes 3 and 7).................................. 399,161 178,605
Deferred revenue and other liabilities.......................................................... 214,001 241,866
Deferred income taxes (Note 4).................................................................. 17,764 --
---------- ----------
TOTAL LIABILITIES............................................................................ 1,462,101 1,126,591
---------- ----------
STOCKHOLDERS' EQUITY (Note 5):
Common stock, $0.50 par value; 150,000,000 shares authorized;
97,380,000 shares issued and outstanding (96,476,000 in 1995)................................ 48,690 48,238
Capital in excess of par value.................................................................. 90,432 72,639
Retained earnings............................................................................... 924,799 756,587
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................................... 1,063,921 877,464
---------- ----------
Commitments and contingent liabilities (Notes 6, 7, 9, 10 and 11)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................ $2,526,022 $2,004,055
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings........................................................................... $179,375 $167,875 $132,400
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
Depreciation and amortization....................................................... 79,812 66,866 55,012
Loss on sales of property and equipment............................................. 5,600 2,199 1,910
Provision for deferred income taxes................................................. 22,411 73,745 (17,800)
(Decrease) increase in deferred revenue and other liabilities....................... (27,865) (26,494) 36,306
Increase in net accounts and notes receivable....................................... (59,830) (75,575) (68,542)
Increase in merchandise inventory, prepaid expenses and other current assets........ (290,644) (317,114) (203,783)
Decrease (increase) in other assets................................................. 1,911 (3,819) (522)
Increase in accounts payable, accrued expenses and other current liabilities, and
accrued income taxes............................................................... 33,910 159,297 173,300
-------- -------- --------
Net cash (used in) provided by operating activities.................................... (55,320) 46,980 108,281
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................... (518,175) (375,406) (252,256)
Proceeds from sales of property and equipment.......................................... 251,454 151,481 128,029
-------- -------- --------
Net cash used in investing activities.................................................. (266,721) (223,925) (124,227)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt.............................................. 92,087 -- --
Proceeds from issuance of long-term debt............................................... 222,000 153,000 --
Principal payments on long-term debt................................................... (2,386) (3,484) (52,748)
Proceeds from issuance of common stock, net............................................ 18,245 8,352 10,150
Dividends paid......................................................................... (11,163) (9,155) (7,674)
-------- -------- --------
Net cash provided by (used in) financing activities.................................... 318,783 148,713 (50,272)
-------- -------- --------
Decrease in cash and cash equivalents.................................................... (3,258) (28,232) (66,218)
Cash and cash equivalents at beginning of year........................................... 46,962 75,194 141,412
-------- -------- --------
Cash and cash equivalents at end of year................................................. $ 43,704 $ 46,962 $ 75,194
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................................... $ 22,905 $ 8,150 $ 5,297
Income taxes........................................................................... $ 88,477 $ 98,894 $ 81,773
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CAPITAL IN
SHARES COMMON EXCESS OF RETAINED
OUTSTANDING STOCK PAR VALUE EARNINGS TOTAL
----------- ------- ---------- -------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
BALANCE AT MARCH 1, 1993....................................... 95,670 $47,835 $ 54,540 $473,141 $ 575,516
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 132,400 132,400
Exercise of common stock options (Note 5).................... 316 158 2,994 -- 3,152
Shares issued under Employee Stock Purchase Plan (Note 5).... 76 38 1,895 -- 1,933
Shares issued under the 1988 Stock Incentive Plan (Note 5)... 146 73 3,589 -- 3,662
Tax benefit from stock issued................................ -- -- 3,367 -- 3,367
Shares cancelled upon reacquisition by Company............... (128) (64) (2,014) -- (2,078)
Unearned compensation-restricted stock (Note 5).............. -- -- 114 -- 114
Cash dividends-common stock ($0.08 per share)................ -- -- -- (7,674) (7,674)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1994................................... 96,080 48,040 64,485 597,867 710,392
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 167,875 167,875
Exercise of common stock options (Note 5).................... 260 130 2,519 -- 2,649
Shares issued under Employee Stock Purchase Plan (Note 5).... 87 43 1,868 -- 1,911
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 211 106 3,740 -- 3,846
Tax benefit from stock issued................................ -- -- 3,272 -- 3,272
Shares cancelled upon reacquisition by Company............... (162) (81) (3,089) -- (3,170)
Unearned compensation-restricted stock (Note 5).............. -- -- (156) -- (156)
Cash dividends-common stock ($0.10 per share)................ -- -- -- (9,155) (9,155)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1995................................... 96,476 48,238 72,639 756,587 877,464
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 179,375 179,375
Exercise of common stock options (Note 5).................... 645 322 7,831 -- 8,153
Shares issued under Employee Stock Purchase Plan (Note 5).... 75 38 2,174 -- 2,212
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 259 129 5,745 -- 5,874
Tax benefit from stock issued................................ -- -- 4,746 -- 4,746
Shares cancelled upon reacquisition by Company............... (75) (37) (1,631) -- (1,668)
Unearned compensation-restricted stock (Note 5).............. -- -- (1,072) -- (1,072)
Cash dividends-common stock ($0.12 per share)................ -- -- -- (11,163) (11,163)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 29, 1996................................... 97,380 $48,690 $ 90,432 $924,799 $1,063,921
----------- ------- ---------- -------- ----------
----------- ------- ---------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Circuit City
Stores, Inc. and its subsidiaries (the Company), all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in
consolidation.
(B) CASH AND CASH EQUIVALENTS
Cash equivalents of $10,113,000 and $18,719,000 at February 29, 1996, and
February 28, 1995, respectively, consist of highly liquid debt securities with
original maturities of three months or less.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas. As discussed in Note 10, swaps are not
held for trading purposes and, therefore, are not carried at fair value.
(D) MERCHANDISE INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by
the average cost method.
(E) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives, which range from
three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(G) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes, measured by applying
currently enacted tax laws. The Company recognizes deferred tax assets if it is
more likely than not that a benefit will be realized.
(H) DEFERRED REVENUE
The Company sells its own extended warranty contracts and extended warranty
contracts on behalf of unrelated third parties. The contracts extend beyond the
normal manufacturer's warranty period, usually with terms of coverage (including
the manufacturer's warranty period) between 12 and 60 months.
All revenue from the sale of the Company's own extended warranty contracts
is deferred and amortized on a straight-line basis over the life of the
contracts. Incremental direct contract costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized. All
other costs are charged to expense as incurred. Commission revenue for the
unrelated third-party extended warranty plans is recognized at the time of sale.
F-26
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(I) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to selling, general and administrative expenses.
(J) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(K) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the year.
(L) RISKS AND UNCERTAINTIES
The Company is the nation's largest retailer of brand-name consumer
electronics and major appliances and a leading retailer of personal computers
and music software. The diversity of the Company's products, customers,
suppliers and geographic operations significantly reduces the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, sources of supply or markets. It is unlikely that any one event
would have a severe impact on the Company's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS)
Land and buildings (20 to 25 years)....................................... $ 89,089 $ 83,109
Construction in progress.................................................. 197,980 122,446
Furniture, fixtures and equipment (3 to 8 years).......................... 389,845 344,923
Leasehold improvements (10 to 15 years)................................... 353,157 286,610
Capital leases, primarily buildings (20 years)............................ 13,140 13,679
---------- ----------
1,043,211 850,767
Less accumulated depreciation and amortization............................ 268,946 257,811
---------- ----------
Property and equipment, net............................................... $ 774,265 $ 592,956
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT
Long-term debt at February 29 or 28 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Term loans.................................................................... $275,000 $100,000
Short-term debt expected to be refinanced..................................... 100,000 53,000
Industrial Development Revenue Bonds due through 2006 at various prime-based
rates of interest ranging from 5.4% to 6.7%................................. 12,393 14,698
Obligations under capital leases (Note 7)..................................... 13,204 13,285
-------- --------
Total long-term debt.......................................................... 400,597 180,983
Less current installments..................................................... 1,436 2,378
-------- --------
Long-term debt, excluding current installments................................ $399,161 $178,605
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$13,073,000 at February 29, 1996, and $15,400,000 at February 28, 1995.
The scheduled aggregate annual principal payments on long-term obligations
for the next five years are as follows: 1997 -- $1,436,000; 1998 -- $1,489,000;
1999 -- $1,586,000; 2000 -- $1,743,000; 2001 -- $176,380,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt includes committed lines of credit and informal credit
arrangements. Amounts outstanding and committed lines of credit available are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.............................. $185,789 $134,022 $ 77,392
-------- -------- --------
-------- -------- --------
Maximum short-term debt outstanding.............................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.............................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
The weighted average interest rate on the outstanding short-term debt was
5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3 percent
during fiscal 1994.
F-28
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT -- Continued
The Company capitalizes interest in connection with the construction of
certain facilities. In fiscal 1996, interest capitalized amounted to $6,780,000
($3,846,000 and $2,626,000 in fiscal 1995 and 1994, respectively).
4. INCOME TAXES
The Company files a consolidated federal income tax return. The components
of the provision for income taxes on earnings before income taxes follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal.......................................................... $ 80,678 $ 21,250 $85,680
State............................................................ 4,536 5,730 8,720
-------- -------- -------
85,214 26,980 94,400
-------- -------- -------
Deferred:
Federal.......................................................... 18,891 69,035 (14,790)
State............................................................ 3,520 4,710 (3,010)
-------- -------- -------
22,411 73,745 (17,800)
-------- -------- -------
Provision for income taxes......................................... $107,625 $100,725 $76,600
-------- -------- -------
-------- -------- -------
</TABLE>
The enactment of the Omnibus Tax Reconciliation Act of 1993 on August 10,
1993, increased the federal statutory income tax rate for corporations from 34
percent to 35 percent effective January 1, 1993. This change in the federal tax
rate and the resulting revaluation of the Company's deferred tax asset had a
favorable impact on the fiscal 1994 provision for income taxes. The effective
income tax rate differed from the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
Federal statutory income tax rate..................................... 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit.................. 2.5 2.5 1.8
Other, net............................................................ -- -- (0.1)
------ ------ ------
Effective income tax rate............................................. 37.5% 37.5% 36.7%
------ ------ ------
------ ------ ------
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................................ $ 24,475 $ 32,049
Inventory capitalization.................................................... 3,784 6,482
Accrued expenses............................................................ 34,190 31,815
Other....................................................................... 3,182 5,114
-------- --------
Total gross deferred tax assets.......................................... 65,631 75,460
-------- --------
Deferred Tax Liabilities:
Depreciation and amortization............................................... 39,800 30,510
Prepaid benefit programs.................................................... 886 2,892
Other prepaid expenses...................................................... 9,376 5,347
Other....................................................................... 6,337 5,068
-------- --------
Total gross deferred tax liabilities..................................... 56,399 43,817
-------- --------
Net Deferred Tax Asset........................................................ $ 9,232 $ 31,643
-------- --------
-------- --------
</TABLE>
F-29
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INCOME TAXES -- Continued
Of the gross deferred tax assets at February 29, 1996, and February 28,
1995, approximately $61 million and $66 million, respectively, can be realized
by carrybacks or offsetting of deferred tax liabilities. Based on the Company's
historical and current pre-tax earnings, management believes the remaining
amount will be realized through future taxable income; therefore, no valuation
allowance is necessary.
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK
In conjunction with the Company's Shareholders Rights Plan, preferred stock
purchase rights were distributed as a dividend at the rate of one right for each
share of the Company's common stock. The rights are exercisable only upon the
attainment of, or the commencement of a tender offer to attain, a specified
ownership interest in the Company by a person or group. When exercisable, each
right would entitle shareholders to buy one four-hundredth of a newly issued
share of Cumulative Participating Preferred Stock, Series E, $20 par value, at
an exercise price of $140 per share. A total of 500,000 shares of such preferred
stock, which have preferential dividend and liquidation rights, have been
authorized; 300,000 shares have been reserved. No such shares are outstanding.
In the event that an acquiring person or group acquires the specified ownership
percentage of the Company's common stock (except pursuant to a cash tender offer
for all outstanding shares determined to be fair by continuing directors) or
engages in certain transactions with the Company after the rights become
exercisable, each right will be converted into a right to purchase, for half the
current market price at that time, shares of the Company's common stock valued
at two times the exercise price.
The Company also has 1,500,000 shares of undesignated Preferred Stock
authorized of which no shares are outstanding.
(B) RESTRICTED STOCK
The Company has issued restricted stock under the provisions of the 1994
and 1988 Stock Incentive Plans whereby key employees are granted restricted
shares of the Company's common stock. Shares are awarded in the name of the
employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1996, restricted stock awards for
258,775 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholders' equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1996, a total of $3,362,500 was charged to operations
($2,552,500 in 1995 and $2,955,400 in 1994). As of February 29, 1996, 499,279
restricted shares were outstanding.
(C) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan for all employees meeting
certain eligibility criteria. Under the Plan, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at 85
percent of its market value. Purchases are limited to 10 percent of an
employee's eligible compensation, up to a maximum of $7,500 per year. At
February 29, 1996, a total of 62,406 shares remained available under the Plan.
During fiscal 1996, 474,889 shares were issued to or purchased on the open
market for employees (537,467 and 436,400 in fiscal 1995 and 1994,
respectively). The average price per share was $29.97, $22.23 and $26.20 in
fiscal 1996, 1995 and 1994, respectively. The purchase price discount is charged
to operations and totaled $2,030,000, $1,760,200 and $1,653,700 in fiscal 1996,
1995 and 1994, respectively.
(D) STOCK INCENTIVE PLANS
Under the Company's stock incentive plans, incentive and non-qualified
stock options may be granted to management, key employees and outside directors
to purchase shares of the Company's common stock. The exercise price for
incentive stock options for employees and non-qualified options for outside
directors is the market value at the date of grant; for non-qualified options
granted under the 1988 Plan for employees, it is at least 85 percent of the
market value at the date of grant (100 percent under the 1994 Plan). Options are
generally exercisable over a period of from one to 10 years from the date of
grant.
F-30
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS -- Continued
Changes in stock options outstanding (and option exercise prices for such
options) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C>
Options outstanding at beginning of year ($5.94 to
$33.00)................................................... 3,709,271 3,593,745 3,494,626
Granted ($18.19 to $34.63).................................. 762,384 750,500 562,425
Exercised ($6.25 to $25.13)................................. (644,806) (260,234) (316,243)
Cancelled ($6.25 to $33.00)................................. (264,143) (374,740) (147,063)
---------- ---------- ----------
Options outstanding at end of year ($5.94 to $34.63)........ 3,562,706 3,709,271 3,593,745
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at end of year ($5.94 to $33.00)........ 1,847,169 2,070,319 1,662,032
---------- ---------- ----------
---------- ---------- ----------
Shares available for grant at end of year (options and
restricted stock)......................................... 2,147,207 2,759,698 1,010,488
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The stock incentive plans provide for the granting of stock appreciation
rights (SARs) in tandem with non-qualified stock option grants at the discretion
of the board of directors' compensation and personnel committee. The SARs
granted to date become fully exercisable only upon a change of control, as
defined, of the Company, notwithstanding other conditions of exercisability of
the options. The SARs permit the optionee to surrender an exercisable SAR for an
amount equal to the excess of the market price of the common stock over the
option price when the right is exercised. Market value is defined as the greater
of the highest closing price of the Company's stock during the 90 days preceding
the change of control or the closing price on the date preceding the exercises.
As of February 29, 1996, 5,895,967 non-qualified options with related SARs had
been granted with such terms (5,417,163 in 1995 and 4,888,333 in 1994).
6. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
----------------------------
1996 1995 1994
------- ------ -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year........................ $ 5,896 $4,485 $ 3,916
Interest cost on projected benefit obligation.......................... 3,632 2,715 2,351
Actual return on plan assets........................................... (9,277) (102) (3,632)
Net amortization....................................................... 6,314 (3,452) 1,212
------- ------ -------
Net pension expense.................................................... $ 6,565 $3,646 $ 3,847
------- ------ -------
------- ------ -------
</TABLE>
F-31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. PENSION PLAN -- Continued
Contributions of $1,160,000, $3,710,000 and $4,503,000 were required in
fiscal 1996, 1995 and 1994, respectively.
The following table sets forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested....................................................................... $ 39,505 $ 25,983
Non-vested................................................................... 5,136 3,720
-------- --------
Total benefits................................................................. 44,641 29,703
Additional amounts related to projected salary increases....................... 22,747 15,910
-------- --------
Projected benefit obligation for services rendered to date..................... 67,388 45,613
Plan assets at fair value...................................................... (47,093) (37,046)
-------- --------
Projected benefit obligation in excess of plan assets.......................... 20,295 8,567
Unrecognized loss from past experience......................................... (14,117) (8,102)
Unrecognized prior service cost................................................ 875 981
Unrecognized net obligation being recognized over 15 years..................... 1,212 1,414
-------- --------
Accrued pension cost........................................................... $ 8,265 $ 2,860
-------- --------
-------- --------
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
--------------------------
1996 1995 1994
---- ---- ----
<S> <C>
Weighted average discount rate.................................. 7.0% 8.0% 7.5%
Rate of increase in compensation levels......................... 6.0% 6.5% 6.0%
Rate of return on plan assets................................... 9.0% 8.0% 9.0%
---- ---- ----
</TABLE>
7. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased
premises. The Company's lease obligations are based upon contractual minimum
rates. For certain locations, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Rental expense and sublease
income for all operating leases are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C>
(AMOUNTS IN THOUSANDS)
Minimum rentals.................................................... $148,082 $118,042 $96,110
Rentals based on sales volume...................................... 2,871 2,513 1,910
Sublease income.................................................... (9,996) (8,875) (8,441)
-------- -------- -------
Net................................................................ $140,957 $111,680 $89,579
-------- -------- -------
-------- -------- -------
</TABLE>
The Company computes rent based on a percentage of sales volumes in excess
of defined amounts in certain store locations. Most of the Company's other
leases are fixed dollar rental commitments, many with rent escalations based on
the Consumer Price Index. Most provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms substantially the same as the initial
terms.
F-32
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING OPERATING
CAPITAL LEASE SUBLEASE
FISCAL LEASES COMMITMENTS INCOME
------- ----------- --------
<S> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................ $ 1,541 $ 163,577 $(10,618)
1998............................................................ 1,541 163,964 (9,316)
1999............................................................ 1,579 161,498 (7,759)
2000............................................................ 1,662 159,327 (6,980)
2001............................................................ 1,681 158,105 (5,987)
After 2001...................................................... 21,683 1,791,524 (35,165)
------- ----------- --------
Total minimum lease payments.................................... 29,687 $2,597,995 $(75,825)
----------- --------
----------- --------
Less amounts representing interest.............................. 16,483
-------
Present value of net minimum capital lease payments
(Note 3)...................................................... $13,204
-------
-------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $183,900,000 ($85,970,000 in
fiscal 1995 and $87,980,000 in fiscal 1994). The Company does not have
continuing involvement under the sale-leaseback transactions.
8. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of earnings,
amounted to $324,335,000, $262,969,000 and $211,022,000 (4.6 percent, 4.7
percent and 5.1 percent of net sales and operating revenues) in fiscal years
1996, 1995 and 1994, respectively.
9. SECURITIZATIONS
(A) CREDIT CARD SECURITIZATIONS
The Company uses securitization transactions, which allow for the sale of
credit card receivables to unrelated entities, to finance the consumer revolving
credit receivables generated by First North American National Bank, its wholly
owned credit card bank subsidiary (the "Bank Subsidiary"). No gain or loss has
been recorded on these sales. Proceeds from securitization transactions were
$692.3 million, $428.4 million and $214.6 million for fiscal 1996, 1995 and
1994, respectively. At February 29 or 28, the following amounts were
outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................... $1,860,459 $1,181,954
Interest retained by Company.............................................. (110,459) (124,206)
---------- ----------
Net receivables transferred............................................... $1,750,000 $1,057,748
---------- ----------
---------- ----------
Net receivables transferred with recourse................................. $ 760,000 $1,057,748
---------- ----------
---------- ----------
Program capacity.......................................................... $1,910,000 $1,060,000
---------- ----------
---------- ----------
</TABLE>
The Bank Subsidiary finances its private-label credit card program through
a single master trust, through both private placement and the public market.
During fiscal 1996, the Bank Subsidiary placed an additional $300 million in the
public market for a total program capacity of $1,060 million. The master trust
vehicle permits further expansion of the securitization programs to meet future
receivables growth. The recourse provisions under the private-label
securitization programs were eliminated during fiscal 1996.
F-33
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. SECURITIZATIONS -- Continued
In addition, the Bank Subsidiary has an asset securitization program in
place for its bankcard receivables that allows the transfer of up to $850
million in receivables as of February 29, 1996. The bankcard securitization
agreements provide recourse to the Company for any cash flow deficiencies if the
monthly credit card cash flows from finance charges are inadequate to cover such
expenses. The Company believes that as of February 29, 1996, no liability
existed under these recourse provisions. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Bank Subsidiary's servicing revenue totaled
$142.9 million, $77.8 million and $54.5 million for fiscal 1996, 1995 and 1994,
respectively.
(B) AUTO LOAN SECURITIZATION
In fiscal 1996, the Company entered into a securitization transaction to
finance the consumer installment credit receivables generated by First North
American Credit Corporation, an installment lending division of the Company. No
gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................................... $ 93,065
Interest retained by Company.............................................................. (6,065)
--------
Net receivables transferred with recourse................................................. $ 87,000
--------
--------
Program capacity.......................................................................... $100,000
--------
--------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The Company believes that as of February 29, 1996, no liability
existed under the recourse provision. As of April 1, 1996, the program capacity
increased to $125 million.
10. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year swaps with notional
amounts totaling $300 million relating to the public issuance of securities by
the master trust. As part of this issuance, $344 million of five-year,
fixed-rate certificates were issued to fund consumer credit receivables. The
Bank Subsidiary is servicer for the accounts, and as such, receives its monthly
cash portfolio yield after deducting interest, charge-offs and other related
costs. The underlying receivables are based on a floating rate. The swaps were
put in place to better match funding costs to the receivables being securitized.
As a result, the master trust pays fixed-rate interest while the Company
utilizes the swaps to convert the fixed-rate obligation to a floating-rate,
LIBOR-based obligation. The fair value of the swaps is the amount at which they
could be settled based on estimates obtained from the counterparties, which are
two banks highly rated by several financial rating agencies. Recording the swaps
at fair value at February 29, 1996, and February 28, 1995, would result in gains
of $19.4 million and $6.3 million, respectively.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175 million. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2.5 million.
In November 1995, the Company entered into a 50-month amortizing swap in
the notional amount of $75 million relating to the auto loan receivable
securitization to convert variable-rate financing costs to a fixed-rate
obligation. The underlying receivables are issued with a fixed-rate finance
charge. The swap was put in place to better match the variable funding costs to
the receivables being securitized and to preserve net portfolio yield. Recording
the swap at fair value at February 29, 1996, would result in a loss of $0.3
million.
F-34
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. INTEREST RATE SWAPS -- Continued
The market and credit risks associated with these swaps are similar to
those relating to other types of financial instruments. Market risk is the
exposure created by potential fluctuations in interest rates and is directly
related to the product type, agreement terms and transaction volume. The Company
does not anticipate significant market risk from swaps, since their use is to
more closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
The Company mitigates credit risk by dealing with highly rated counterparties.
11. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Company's evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the Company's financial
position, liquidity or results of operations.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
---------------------- ---------------------- ---------------------- ---------------------- ----------
1996 1995 1996 1995 1996 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating
revenues.............. $1,391,658 $1,048,695 $1,600,805 $1,218,572 $1,783,446 $1,405,445 $2,253,214 $1,910,235 $7,029,123
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ $ 319,886 $ 263,677 $ 368,292 $ 309,617 $ 405,134 $ 336,049 $ 541,518 $ 475,657 $1,634,830
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings............ $ 24,618 $ 19,688 $ 41,246 $ 36,055 $ 31,451 $ 28,442 $ 82,060 $ 83,690 $ 179,375
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings per
share................. $ 0.25 $ 0.20 $ 0.42 $ 0.37 $ 0.32 $ 0.29 $ 0.83 $ 0.86 $ 1.82
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
1995
----------
<S> <C>
(AMOUNTS IN THOUSANDS EX
Net sales and operating
revenues.............. $5,582,947
----------
Gross profit............ $1,385,000
----------
Net earnings............ $ 167,875
----------
Net earnings per
share................. $ 1.72
----------
</TABLE>
F-35
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying consolidated balance sheets of Circuit
City Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended February
29, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995 and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 29, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1996
F-36
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues..................................... $1,863,947 $1,783,446 $5,246,256 $4,775,909
Cost of sales, buying and warehousing................................ 1,441,088 1,378,312 4,064,799 3,682,597
---------- ---------- ---------- ----------
Gross profit......................................................... 422,859 405,134 1,181,457 1,093,312
---------- ---------- ---------- ----------
Selling, general and administrative expenses......................... 381,804 346,264 1,051,190 921,072
Interest expense..................................................... 9,122 8,582 20,348 16,599
---------- ---------- ---------- ----------
Total expenses....................................................... 390,926 354,846 1,071,538 937,671
---------- ---------- ---------- ----------
Earnings before income taxes......................................... 31,933 50,288 109,919 155,641
Provision for income taxes........................................... 12,146 18,837 41,766 58,326
---------- ---------- ---------- ----------
Net earnings......................................................... $ 19,787 $ 31,451 $ 68,153 $ 97,315
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
and common share equivalents....................................... 99,489 98,750 99,335 98,549
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share............................................... $ 0.20 $ 0.32 $ 0.69 $ 0.99
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends paid per common share...................................... $ 0.035 $ 0.030 $ 0.100 $ 0.085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOV. 30, 1996 FEB. 29, 1996
------------- -------------
<S> <C>
(UNAUDITED)
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................................... $ 41,310 $ 43,704
Net accounts and notes receivable.............................................................. 437,514 324,395
Merchandise inventory.......................................................................... 1,886,911 1,323,183
Deferred income taxes.......................................................................... 12,926 26,996
Prepaid expenses and other current assets...................................................... 36,112 17,399
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 2,414,773 1,735,677
Property and equipment, net...................................................................... 900,305 774,265
Other assets..................................................................................... 18,452 16,080
------------- -------------
TOTAL ASSETS..................................................................................... $ 3,333,530 $ 2,526,022
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt......................................................... $ 1,466 $ 1,436
Accounts payable............................................................................... 904,398 604,488
Short-term debt................................................................................ 593,188 92,087
Accrued expenses and other current liabilities................................................. 75,296 123,789
Accrued income taxes........................................................................... 4,255 9,375
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 1,578,603 831,175
Long-term debt, excluding current installments................................................... 430,030 399,161
Deferred revenue and other liabilities........................................................... 174,043 214,001
Deferred income taxes............................................................................ 18,389 17,764
------------- -------------
TOTAL LIABILITIES........................................................................... 2,201,065 1,462,101
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value; 250,000,000 shares authorized;
97,960,000 shares issued and outstanding, November 30, 1996................................. 48,980 48,690
Capital in excess of par value................................................................. 100,303 90,432
Retained earnings.............................................................................. 983,182 924,799
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................................. 1,132,465 1,063,921
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................................... $ 3,333,530 $ 2,526,022
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
----------------------
1996 1995
--------- ---------
<S> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings $ 68,153 $ 97,315
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization.................................................................. 74,614 60,277
(Gain) loss on sales of property and equipment................................................. (1,117) 3,856
Provision for deferred income taxes............................................................ 14,695 5,211
Decrease in deferred revenue and other liabilities............................................. (39,958) (27,970)
Increase in net accounts and notes receivable.................................................. (113,119) (62,982)
Increase in merchandise inventory, prepaid expenses and other current assets................... (582,441) (936,021)
(Increase) decrease in other assets............................................................ (2,372) 1,176
Increase in accounts payable, accrued expenses and other current liabilities
and accrued income taxes..................................................................... 246,297 418,997
--------- ---------
Net cash used in operating activities............................................................. (335,248) (440,141)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................................... (400,408) (397,000)
Proceeds from sales of property and equipment..................................................... 200,871 178,207
--------- ---------
Net cash used in investing activities............................................................. (199,537) (218,793)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt......................................................... 501,101 435,000
Proceeds from issuance of long-term debt.......................................................... 32,088 222,000
Principal payments on long-term debt.............................................................. (1,189) (2,158)
Proceeds from issuance of common stock, net....................................................... 10,161 11,335
Dividends paid.................................................................................... (9,770) (8,244)
--------- ---------
Net cash provided by financing activities......................................................... 532,391 657,933
--------- ---------
Decrease in cash and cash equivalents............................................................... (2,394) (1,001)
Cash and cash equivalents at beginning of year...................................................... 43,704 46,962
--------- ---------
Cash and cash equivalents at end of period.......................................................... $ 41,310 $ 45,961
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Circuit City Stores, Inc. and its
subsidiaries (the Company) conform to generally accepted accounting principles.
The interim period financial statements are unaudited; however, in the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim consolidated financial
statements have been included. The fiscal year-end balance sheet data was
derived from audited financial statements. The consolidated financial statements
included herein should be read in conjunction with the notes to consolidated
financial statements included in the Company's 1996 annual report to
stockholders.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
At November 30, 1996, $150 million was drawn on the unsecured revolving
bank credit facility and has been included in short-term debt.
3. INTEREST RATE SWAPS
The Company entered into a new 40-month amortizing swap relating to the
CarMax auto loan receivable securitization during the quarter with a notional
amount of approximately $63 million. Including this new swap, recording the
Company's interest rate swaps at fair value at November 30, 1996, would result
in a gain of approximately $13.0 million compared to a gain of $16.6 million at
February 29, 1996. The notional amount of the swaps was approximately $598
million at November 30, 1996, and $550 million at February 29, 1996.
F-40
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 3, 1997
18,860,000 SHARES
CIRCUIT CITY STORES, INC. -- CARMAX GROUP
COMMON STOCK
OF
CIRCUIT CITY STORES, INC.
------------------------
OF THE 18,860,000 SHARES OF CARMAX STOCK BEING OFFERED, 3,772,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 15,088,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." THE NET PROCEEDS FROM THE OFFERING WILL BE ALLOCATED TO
THE CARMAX GROUP. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE CARMAX STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $18 AND $20. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE CARMAX STOCK IS COMMON STOCK OF THE COMPANY THAT IS INTENDED TO REFLECT
SEPARATELY THE PERFORMANCE OF THE USED- AND NEW-CAR RETAIL BUSINESS
CONSTITUTING THE CARMAX GROUP OF THE COMPANY. A SECOND SERIES OF COMMON STOCK
OF THE COMPANY, THE CIRCUIT CITY STOCK, IS INTENDED TO REFLECT SEPARATELY
THE PERFORMANCE OF THE CONSUMER ELECTRONICS AND APPLIANCE RETAIL BUSINESS
CONSTITUTING THE COMPANY'S CIRCUIT CITY GROUP, INCLUDING THE CIRCUIT CITY
GROUP'S INTEREST IN THE CARMAX GROUP. HOLDERS OF CARMAX STOCK AND
CIRCUIT CITY STOCK ARE ALL HOLDERS OF COMMON STOCK OF THE COMPANY AND
CONTINUE TO BE SUBJECT TO ALL OF THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE COMPANY AND ALL OF ITS BUSINESSES, ASSETS AND
LIABILITIES. THE CIRCUIT CITY STOCK IS NOT BEING OFFERED FOR SALE BY
THIS PROSPECTUS.
DIVIDENDS ON THE CARMAX STOCK WILL BE PAID AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY OUT OF THE LESSER OF (I) THE ASSETS OF THE COMPANY
LEGALLY AVAILABLE FOR THE PAYMENT OF DIVIDENDS AND (II) THE CARMAX GROUP
AVAILABLE DIVIDEND AMOUNT. THE COMPANY CURRENTLY DOES NOT INTEND TO PAY
DIVIDENDS ON THE CARMAX STOCK. THE VOTING POWER OF ONE SHARE OF CARMAX
STOCK RELATIVE TO ONE SHARE OF CIRCUIT CITY STOCK WILL FLUCTUATE BASED
UPON THE TIME-WEIGHTED RELATIVE MARKET VALUES THEREOF.
SUBJECT TO CERTAIN CONDITIONS, THE CARMAX STOCK MAY BE REDEEMED, AT THE
COMPANY'S OPTION, FOR SHARES OF ONE OR MORE WHOLLY-OWNED SUBSIDIARIES OF THE
COMPANY TO WHICH THE ASSETS AND LIABILITIES OF THE CARMAX GROUP HAVE BEEN
TRANSFERRED. IN THE EVENT OF A DISPOSITION BY THE COMPANY OF ALL OR
SUBSTANTIALLY ALL OF THE PROPERTIES AND ASSETS OF THE CARMAX GROUP, THE COMPANY
WILL, SUBJECT TO CERTAIN CONDITIONS AND LIMITATIONS, BE REQUIRED TO (I) PAY A
DIVIDEND ON OR REDEEM SHARES OF CARMAX STOCK IN AN AMOUNT EQUAL TO THE PRODUCT
OF THE OUTSTANDING CARMAX FRACTION, MULTIPLIED BY THE NET PROCEEDS OF SUCH
DISPOSITION OR (II) CONVERT EACH OUTSTANDING SHARE OF CARMAX STOCK INTO A NUMBER
OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 110% OF THE RATIO OF THE AVERAGE MARKET
VALUE OF ONE SHARE OF CARMAX STOCK TO THE AVERAGE MARKET VALUE OF ONE SHARE OF
CIRCUIT CITY STOCK. THE COMPANY MAY, AT ANY TIME, CONVERT EACH SHARE OF CARMAX
STOCK INTO A NUMBER OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 115% OF THE RATIO
OF THE TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CARMAX STOCK TO THE
TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CIRCUIT CITY STOCK. IN THE
EVENT OF THE LIQUIDATION OF THE COMPANY, THE RIGHTS OF THE HOLDERS OF THE CARMAX
STOCK AND THE CIRCUIT CITY STOCK WILL BE FIXED ON A PER SHARE BASIS IN
PROPORTION TO THEIR RESPECTIVE LIQUIDATION UNITS, WITH EACH SHARE OF CARMAX
STOCK HAVING .5 OF A LIQUIDATION UNIT, AND EACH SHARE OF CIRCUIT CITY STOCK
HAVING ONE LIQUIDATION UNIT.
THE FEATURES OF THE CARMAX STOCK AND THE CIRCUIT CITY STOCK ARE MORE FULLY
DISCUSSED UNDER "SUMMARY -- THE CARMAX STOCK" AND "DESCRIPTION OF CAPITAL STOCK"
IN THIS PROSPECTUS. ------------------------
THE CARMAX STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "KMX,"
SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------ ------------------------ ------------------------
<S> <C>
PER SHARE........................................... $ $ $
TOTAL(3)............................................ $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$1,101,450. SEE "UNDERWRITERS."
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF TO PURCHASE UP TO AN AGGREGATE OF
2,829,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE
TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES OF CARMAX STOCK ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND
IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT FEBRUARY , 1997
AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
It is expected that the following expenses will be incurred in connection
with the issuance and distribution of the CarMax Stock:*
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee........................................... $ 131,449
NASD filing fee......................................................................... 30,500
NYSE listing fee........................................................................ 107,000
Blue Sky fees and expenses.............................................................. 7,500
Printing and engraving expenses......................................................... 225,000
Legal fees and expenses................................................................. 350,000
Accounting fees and expenses............................................................ 200,000
Miscellaneous........................................................................... 50,000
----------
Total............................................................................ $1,101,449
----------
----------
</TABLE>
- ---------------
* All of the expenses except the Securities and Exchange Commission filing fee,
the NASD filing fee and the NYSE listing fee represent estimates only.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The laws of the Commonwealth of Virginia pursuant to which the Company is
incorporated permit it to indemnify its officers and directors against certain
liabilities with the approval of its shareholders. The Articles of Incorporation
of the Company, which have been approved by its shareholders, provide for the
indemnification of each director and officer (including former directors and
officers and each person who may have served at the request of the Company as a
director or officer of any other legal entity and, in all such cases, his or her
heirs, executors and administrators) against liabilities (including expenses)
reasonably incurred by him or her in connection with any actual or threatened
action, suit or proceeding to which he or she may be made a party by reason of
his or her being or having been a director or officer of the Company, except in
relation to any action, suit or proceeding in which he or she has been adjudged
liable because of willful misconduct or a knowing violation of the criminal law.
The Company has purchased directors' and officers' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company and its subsidiaries against certain
losses resulting from claims against them in their capacities as directors and
officers to the extent that such losses are not indemnified by the Company and
(2) the Company to the extent that it indemnifies such directors and officers
for losses as permitted under the laws of Virginia.
In the Underwriting Agreement, a proposed form of which is filed as Exhibit
1.1 hereto, the Underwriters will agree to indemnify, under certain conditions,
the Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 16. EXHIBITS.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
**1.1 Form of Underwriting Agreement.
4.1 Registrant's Amended and Restated Articles of Incorporation, effective July 10, 1996, filed as Exhibit
3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767)
are expressly incorported herein by this reference.
**4.2 Form of Registrant's Articles of Amendment and Restatement, to be filed with the Virginia State
Corporation Commission prior to the completion of this Offering.
**4.3 (a) Form of Certificate of Circuit City Stores, Inc. -- CarMax Group Stock.
**4.3 (b) Form of Certificate of Circuit City Stores, Inc. -- Circuit City Group Stock.
4.4 Registrant's Bylaws, as Amended and Restated June 18, 1996, filed as Exhibit 3 (ii) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767) are expressly
incorporated herein by this reference.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
4.5 Amended and Restated Rights Agreement dated March 5, 1996, between Registrant and Norwest Bank Minnesota,
N.A., as Rights Agent, filed as Exhibit 4(a) to Registrant's Current Report on Form 8-K dated March 5,
1996 (File No. 1-5767) is expressly incorporated herein by this reference.
**4.6 Form of Amended and Restated Rights Agreement between Registrant and Norwest Bank Minnesota, N.A., as
Rights Agent, as proposed to be amended and restated prior to the completion of the Offering.
**5.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the Circuit City Stores,
Inc. -- CarMax Group Stock and the CarMax Group rights to purchase Preferred Stock, Series F, being
registered.
**5.2 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the legality of the Circuit City
Stores, Inc. -- Circuit City Group Stock and the Circuit City Group rights to purchase Preferred Stock,
Series E, being registered.
**8.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
*23.1 Consent of KPMG Peat Marwick LLP.
**23.2 Consents of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5.1, 5.2 and 8.1).
**24 Powers of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused
this amended registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico,
Commonwealth of Virginia, on February 3, 1997.
CIRCUIT CITY STORES, INC.
By: /s/ MICHAEL T. CHALIFOUX
------------------------------
MICHAEL T. CHALIFOUX
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
respective capacities and on the dates indicated opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ----------------------
<S> <C>
/s/ RICHARD L. SHARP* President, Chief Executive Officer and February 3, 1997
- ------------------------------------------------------ Chairman of the Board (Principal
RICHARD L. SHARP Executive Officer)
/s/ ALAN L. WURTZEL* Vice Chairman of the Board and Director February 3, 1997
- ------------------------------------------------------
ALAN L. WURTZEL
/s/ MICHAEL T. CHALIFOUX Senior Vice President, Chief Financial February 3, 1997
- ------------------------------------------------------ Officer, Secretary and Director
MICHAEL T. CHALIFOUX (Principal Financial Officer)
/s/ RICHARD N. COOPER* Director February 3, 1997
- ------------------------------------------------------
RICHARD N. COOPER
/s/ BARBARA S. FEIGIN* Director February 3, 1997
- ------------------------------------------------------
BARBARA S. FEIGIN
/s/ THEODORE D. NIERENBERG* Director February 3, 1997
- ------------------------------------------------------
THEODORE D. NIERENBERG
/s/ HUGH G. ROBINSON* Director February 3, 1997
- ------------------------------------------------------
HUGH G. ROBINSON
/s/ WALTER J. SALMON* Director February 3, 1997
- ------------------------------------------------------
WALTER J. SALMON
/s/ MIKAEL SALOVAARA* Director February 3, 1997
- ------------------------------------------------------
MIKAEL SALOVAARA
/s/ JOHN W. SNOW* Director February 3, 1997
- ------------------------------------------------------
JOHN W. SNOW
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ----------------------
<S> <C>
/s/ EDWARD VILLANUEVA* Director February 3, 1997
- ------------------------------------------------------
EDWARD VILLANUEVA
/s/ PHILIP J. DUNN* Principal Accounting Officer February 3, 1997
- ------------------------------------------------------
PHILIP J. DUNN
</TABLE>
*By: /s/ MICHAEL T. CHALIFOUX
--------------------------------
MICHAEL T. CHALIFOUX
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
**1.1 Form of Underwriting Agreement.
4.1 Registrant's Amended and Restated Articles of Incorporation, effective July 10, 1996, filed as Exhibit
3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767)
are expressly incorported herein by this reference.
**4.2 Form of Registrant's Articles of Amendment and Restatement, to be filed with the Virginia State
Corporation Commission prior to the completion of this Offering.
**4.3 (a) Form of Certificate of Circuit City Stores, Inc. -- CarMax Group Stock.
**4.3 (b) Form of Certificate of Circuit City Stores, Inc. -- Circuit City Group Stock.
4.4 Registrant's Bylaws, as Amended and Restated June 18, 1996, filed as Exhibit 3 (ii) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767) are expressly
incorporated herein by this reference.
4.5 Amended and Restated Rights Agreement dated March 5, 1996, between Registrant and Norwest Bank Minnesota,
N.A., as Rights Agent, filed as Exhibit 4(a) to Registrant's Current Report on Form 8-K dated March 5,
1996 (File No. 1-5767) is expressly incorporated herein by this reference.
**4.6 Form of Amended and Restated Rights Agreement between Registrant and Norwest Bank Minnesota, N.A., as
Rights Agent, as proposed to be amended and restated prior to the completion of the Offering.
**5.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the Circuit City Stores,
Inc. -- CarMax Group Stock and the CarMax Group rights to purchase Preferred Stock, Series F, being
registered.
**5.2 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the legality of the Circuit City
Stores, Inc. -- Circuit City Group Stock and the Circuit City Group rights to purchase Preferred Stock,
Series E, being registered.
**8.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
*23.1 Consent of KPMG Peat Marwick LLP.
**23.2 Consents of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5.1, 5.2 and 8.1).
**24 Powers of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Circuit City Stores, Inc.:
We consent to the use of our reports included herein and to the references
to our firm under the headings "CarMax Group Selected Historical Financial
Data," "Company Selected Historical Financial Data" and "Experts" in the
prospectus.
/S/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 3, 1997
